Why lefties need to learn to love the GST

We’re sorry, this feature is currently unavailable. We’re working to restore it. Please try again later.

Advertisement

This was published 2 years ago

Opinion

Why lefties need to learn to love the GST

If there’s a more misunderstood Australian policy than the GST, I haven’t found it. I’m a centrist kind of guy – I don’t buy into the tribal loyalties on either side. I’m an economist, so I do care about efficiency, but I also care about equity. I’m just a boring technocrat.

But I’ve always looked upon the reflexive hatred of the GST by the Australian left with bemusement. I’m not sure from where it stems – perhaps its championing by then-neoliberal-poster-child John Hewson or its introduction by those neoliberal shills John Howard and Peter Costello.

Paul Keating campaigned against a GST in 1993, but was all for one when he was treasurer.

Paul Keating campaigned against a GST in 1993, but was all for one when he was treasurer.Credit: Ray Kennedy

Or perhaps Paul Keating’s staunch opposition at the 1993 election cast hatred of the GST as a Labor article of faith, like so many other Keating pronouncements, for better or worse. And this overlooks the fact that, before he was against it as prime minister, he was for it as treasurer.

I’ve been puzzled because it’s so clear to me that the GST offers the only viable pathway to so many of the left’s desires. The northern Europeans – not exactly bastions of unbridled capitalism and extreme inequality – have understood this for decades.

The Commonwealth raises just 20 per cent of revenue from the GST, compared with just under 50 per cent on average in the OECD. Norway, Sweden, and Denmark have GST rates of 25 per cent, Finland’s is 24 per cent, and the Netherlands’ is 21 per cent. These countries didn’t build their welfare states atop high wealth and company taxes, or other flights of left-wing fancy.

Loading

What they understand, but which Australia’s left seems not to, is that state capacity can only be built on a strong, broad, and resilient tax base. They understand that, in order to be achievable and sustainable, the state must be funded in a way that maintains prosperity.

I suspect much confusion stems from something as trivial as the name. In Australia, we call it a “Goods and Services Tax”, creating an impression it’s a tax on goods and services. This is compounded by the line on receipts suggesting we consumers are the ones ponying up for the full 10 per cent.

I could go on for hours about why that’s wrong but consider just one point. The GST is not a sales tax. The Europeans call it a “value-added tax” because that’s exactly what it is. Businesses pay GST not on their sales, but on the value they add in production. If a business buys inputs for $100 and sells the output (either to a consumer or business) for $200, it pays GST only on the $100 markup.

Advertisement

So, if you think about it, the GST is far closer to a tax on profits, like the company tax. How then can you be staunchly in favour of higher company taxes but against a higher GST? Moreover, unlike the company tax, the GST cannot be eroded by multinational profit shifting because the profit-shifting transactions aren’t included when calculating tax payable. So it’s even better.

The classic argument economists raise in favour of the GST is that it’s more efficient than the income tax, encouraging saving and investment, and thus economic growth. And that’s true. But, to me, its biggest benefit is in having far greater integrity, being harder to avoid and evade, and targeting taxpayers who otherwise would escape the income tax.

Illustration: Simon Letch

Illustration: Simon LetchCredit:

If you inherit $10 million, you’ll pay $0 in income taxes, but if you then buy a Ferrari SF90 Stradale for $850,000, you’ll pay more than $70,000 in GST. Or take someone with $1 million in true income who arranges their tax affairs – either legally or illegally – to pay no net income tax. By taxing more of what they earn, a higher GST operates as a kind of “Buffett Rule”, ensuring the rich, like Warren Buffett, pay no less in tax as a proportion of their income than the middle classes.

In this way, the GST is implicitly a wealth tax. Is there any real difference between taxing 10 per cent of someone’s wealth, and taxing 10 per cent of everything they could ever buy with that wealth? And, in practice, it’s a lot easier to implement and harder to avoid or evade than an explicit wealth tax. What’s not to like?

Distributional concerns, while I find generally exaggerated, can easily be addressed by changes to income taxes, pensions, and unemployment benefits. Even a universal basic income. If the left ever wants to achieve real progress, it must stop demanding every single measure on its own be progressive, and instead focus on achieving a more progressive system overall.

Loading

We can, of course, have a long argument about the details. But I really can’t see any good reason to oppose a 20 per cent comprehensive GST that raises an additional $100 billion or so a year, to be used to achieve a fairer and more prosperous society. And I certainly can’t think of a more viable path for the left to achieve real progress.

Steven Hamilton is an assistant professor of economics at George Washington University in Washington DC and visiting fellow at the Tax and Transfer Policy Institute at the ANU. Ross Gittins is on leave.

The Morning Edition newsletter is our guide to the day’s most important and interesting stories, analysis and insights. Sign up here.

Most Viewed in National

Loading