Efficiency argument for GST reform doesn't stack up - To The Point





SUBJECT/S: Deloitte tax reform report.

LAURA JAYES: Talking about a broader-based GST and the cost it would have to the economy, Chris Richardson, the economist at Deloitte Access Economics, says that it is far more efficient to look at the GST because you can compensate those lower to middle income earners. Andrew Leigh, do you agree with that assessment?

ANDREW LEIGH, SHADOW ASSISTANT TREASURER: Well Laura, Chris has been a really important contributor to the Australian tax debate over the decades. I think it's an interesting report, there is much to agree with in broad terms. I like the point that the report makes that anyone that argues for a tax cut without saying where the revenue will come from shouldn't be taken seriously. But on the point of the GST, I did think that the report was mistaken in saying that the GST was a more efficient tax than income tax. Indeed, the report reprints a chart from the Treasury's tax white paper which shows the GST and the income tax as having the same efficiency cost on the economy. About 20 cents cost for one every dollar raised. And then, the efficiency cost goes up if you have to compensate households through increasing Government payments. That's something that the report doesn't take enough account of. If you look at where the highest marginal tax rates are in Australia, they're not the ones being paid by multi-millionaires. They're the ones being paid by welfare recipients. Raise them and that’s got to have a big efficiency cost.

PETER VAN ONSELEN: Andrew Leigh, how does the Opposition deal with the argument that you can't really counter easily enough, which is that whatever is happening with growth and unemployment and all the rest of it, the projections under Labor were worse. Labor would do worse because we've seen their track record when they were in Government. This is very much their new line; when they were in Opposition we were told it would be more easily fixed than it clearly has or will be.

LEIGH: Well Peter, of course, when they were in Opposition they were saying that they would have the budget in surplus in the first year and every year following that. They said their election would be a surge of confidence to the economy; like a shot of adrenaline. Since the Government's first budget though we've had annual growth downgraded every quarter since that first budget came down. We've got consumer confidence now 11 points below where it was at the election. One measure of business confidence is at the lowest it has been in four years, and unemployment hasn't been higher in a decade. So, certainly the performance in the economy has been disappointing and well below where the Pre-election Economic and Fiscal Outlook had it. Even if you just take debt for example, debt in the Pre-election Economic and Fiscal Outlook when the Government took over was projected to peak at 13 per cent. Now it is projected to peak at 18 per cent and they have doubled the deficit in the last 12 months. So even if you hold them to their own economic test, Peter, they said debt and deficits were going to be the thing they would fix; they've made it worse.

JAYES: Dr Leigh, just looking at this report from Access Economics, you yourself said that Chris Richardson and Deloitte do add to the conversation very much in the political sphere. But this has really been the first little bit of modelling we've seen on increasing or broadening the base of the GST. So as an as astute political observer, a player yourself, and an economist, it's wrong to rule out touching things like the GST isn't it?

LEIGH: Well Laura, we haven't made this decision lightly. We've looked very carefully at the evidence such as that which is presented in the paper, which suggests that the efficiency costs of the GST is not as extraordinarily low as you might think. That's partly because the GST has a range of exemptions which effectively raise the efficiency cost of raising the GST. But we also know it is one of the most inequitable taxes, Laura. We know for low-income households they don't save anything, they spend all of their paycheques whereas for high-income households they save about a quarter of their incomes.

VAN ONSELEN: How did Paul Keating get it so wrong, Dr Leigh? What was he smoking to come out of the 1985 Tax Summit and suggested a consumption tax?

LEIGH: Well look, we eventually moved from a hodgepodge of sales taxes to a GST, Peter. And in retrospect, that was a reasonable economic change to make. But we're not debating today whether we should have a GST, we're debating whether we should raise the GST. I'm arguing to you that if you want to look at efficient tax changes, they'll mostly be found at the state and territory level. The states and territories have the most inefficient taxes in the form of stamp duties and insurance taxes and they have the most efficient tax in the form of land tax. The ACT Government, to its credit, has made a shift from the first category to the second. Tom Koutsantonis and Jay Weatherill in South Australia are looking at whether they can achieve the same thing, there’s a huge efficiency gain to be made through changes like that. At the federal level, I most certainly acknowledge that the company tax has a significant efficiency cost because capital can be pretty footloose. That's why Labor has been willing to engage in a conversation about how we might bring down the corporate tax rate by broadening the base. Our multinational tax package isn't just aimed at raising revenue, it's also a classic base-broadening measure so you can look at long-term bringing that tax rate down, as Chris Bowen and Bill Shorten have said.

JAYES: Dr Leigh, can I ask about another aspect of this report and it talks about bracket creep as well. Of course it’s as a drag on the economy but not actually making up as much revenue as the Government first thought and indeed the Opposition as well. What do you make of that?

LEIGH: Well Laura, the estimates on the impact of bracket creep depend entirely on wage growth. We've now got wage growth at its lousiest since those numbers began in the late 1990s, really sluggish wage growth. At a time when we've got high unemployment, low wage growth means low bracket creep. But the fundamentals underlying that are even more important still, they suggest that the Australian economy needs to be doing better and I worry that the Government doesn't have that long term plan around generating jobs. Whether they be in science, technology, engineering and maths or in other areas. I also worry that the Government isn't thinking ahead to the two big potential shocks to the Australian economy that worry me: a market correction in China and an increase in interest rates in the United States. Those two big shocks are ones that we need to be better prepared for than we are. The long-term investment in jobs of the future is something that the Government seems to have dropped the ball on.

JAYES: Shadow Assistant Treasurer, Andrew Leigh, thanks so much for your time on To The Point.

LEIGH: Thanks, Laura, thanks Peter.



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