Would expanding the GST actually be regressive?

gst_toonMartin Parkinson has kicked off another round of speculation about increasing GST revenue through either increasing the rate or expanding the base.

Raising taxes is the number one defence against budget cuts in areas that we want to protect, or new areas of social expenditure. In spite of this, calls to increase the GST are consistently met with opposition from the Left on the basis that they consider the GST to be a regressive tax. A tax that collects a higher percentage of the income of from poor people than rich people is a bad thing.

Given the consistency of these views, it might surprise to read that broadening the GST, or even raising it, is not necessarily regressive. In fact, in one area, broadening the base of the GST is actually create a more progressive tax system in and of itself.

Spending on education

Even if we are to be lazy and analyse the GST separate from the rest of the tax and transfer system, as most critics do, it is not true that expanding the GST is by default regressive.

Education, health, childcare, water and sewerage services and fresh food are amongst the areas exempt from the GST. The prevailing argument is that poorer households spend a higher proportion of their income on these areas, so taxing them would be regressive.

Certainly in the areas of health and, particularly, food, households with lower incomes spend more of it on these things than higher income households. In education at least, this is not the case.

This shouldn’t be too shocking, given the cost of private schooling and full fee university courses generally used by high income and high wealth families. The ABS breaks down education expenditure by income bracket in the Household Expenditure Survey, and the 2009-20 results looked like this.

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The more we earn, the more of our disposable income is spent on education. Therefore, broadening the GST to education would make the tax system more progressive, not less.

As a side note: the case of education above should hopefully spark some thoughts on the benefits of universal service delivery versus relying on progressive taxes.

No tax is an island

The GST exists not only as part of a broader tax system, but also as part of the welfare state. The progressiveness or regressiveness of any single item within the tax and transfer system (let alone other welfare state activities) is largely irrelevant; what matters is how changes to that system alter the progressiveness of the system as a whole. When the GST was first introduced, it was accompanied by a compensation package for low income households. From what I understand (but I haven’t done the analysis) it failed by under-compensating, but this approach is typical in such reforms in Australia.

By contrast, the carbon tax compensation, packaged up very similarly, deliberately over-compensated low income households through tax cuts and transfers to address risk of higher than expected cost impacts. This is the approach that should accompany any broadening or increasing of the GST.

The carbon tax was regressive too, before the household compensation package is taken into account. I don’t recall much complaint about that in the same circles.

Progressive and opposing tax increases? Well, you don’t get to be both. 

The more sophisticated criticisms of the GST, generally coming from the community sector, acknowledged the role of compensation but argued that it is easier to erode the compensation in the future, whilst the chances of eroding the GST are slim to none. This might have made more sense a decade and a half ago, but since then the strains on State budgets are showing more acutely.

The Grattan Institue has estimated that expanding the GST the cover private spending on fresh food, health, education, childcare,
water and sewerage could collect $13 billion per year, distributed to revenue starved States, even after compensation for low income households. That was without including financial services, which on estimation would raise nearly $4 billion more.

Given the need to address declining State revenues to shore up schools, hospitals, fire services, etc – and that GST revenue flows through to State budgets – the attitudes towards the GST by progressives needs to be reviewed. that risk of maintaining the compensation levels needs to be addressed in other ways than just saying no to broadening the GST.

Some of the fastest growing areas of the economy are exempt from GST, especially health, whilst other State revenues are declining. Continued deterioration of State budgets mean less services that lower income households rely on. Expanding the GST may be the circuit breaker.

Update: Here’s an interesting Twitter exchange with Maree O’Halloran of the Welfare Rights Network, who is concerned about people who fall in the gaps of compensation. It’s real consideration for people who sit in the messy space between welfare payments and the tax system.

I’m not sure how the carbon tax compensation addressed this, if it did, but I’ll have a look. It is a real risk in relying on compensation, and the support for GST expressed above would be contingent on a solution. However, the risk of continued decline in State revenues is already rearing it’s head, and must also be addressed.

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