There has been much speculation recently about whether the GST should be increased, and by what means. With a federal budget looming that is likely to have us shaking in our boots; with the “age of entitlement” swiftly coming to an end; and with budget cuts ranging from education to healthcare, has the time come for GST to increase?
Before we all start lashing out, consider this: New Zealand increased their GST rate from 12.5% to 15% in 2010. And this was not met with political uproar. It had already been increased once, from 10% to 12.5% in 1989. But importantly, for mostly political reasons, the 2010 increase wasoffset by the top tax rate for income over NZ$70,000 being slashed from 38% to 33%. Perhaps, to negate the effects of GST in Australia, there would need to be some compensation in other areas of tax.
But coming back to Australia, there are worries that increasing this tax will place too big of a burden on the poor. Why is this, you may ask? Well, GST is considered a regressive tax. Low-income consumers have a higher marginal propensity to consume: this means that a higher percentage of their money earned is spent than high-income earners. Therefore, if a flat tax is put on goods and services, low-income earners are spending a higher proportion of their income on the tax than high income earners. So, it’s regressive: there is a higher burden on low-income earners.
Base broadening is another issue, one which the government could take advantage of instead of or in conjunction with an increase in the tax. At the moment, in order to reduce the regressive effects of the GST, basic foods like fresh fruit and vegetables, milk, bread, eggs and other similar products are excluded from the GST. So is private health and education., In order to increase revenues though, the government could broaden the base of the tax. But this would cause similar issues as increasing the rate of the tax.
If basic foods were to be included in the GST, then the lowest income earners would be affected the most, due to their higher marginal propensity to consume. Some may argue then, to broaden the GST base to just private health and education. But, there are still equity issues here (though perhaps not seemingly so dire). Yes, lower income earners are much less likely to consume private health and education. Primarily, middle and high-income earners do. But if GST is placed on these services, then many middle-income earners may not be able to afford them. While we must understand that these services are limited to those who earn more money, should the best health and education services be exclusive to an elite minority? As time passes, would that not cause issues with income distribution and social divide? Base broadening, therefore, has implications for social equity as well.
Finally, there is another possibility that can yet be exhausted: online shopping. Currently, if you buy something online from overseas, you do not pay GST unless the order is over $1000. Perhaps there could be some credence in decreasing to the GST threshold. On a similar vein, the state of California recently introduced an internet sales tax, whereby all internet purchases were charged: it raised $US260 million in one year.
A decrease in the GST threshold may not be considered as regressive as the other forms mentioned. Many people shop for discretionary goods online. A lovely dress to wear to dinner, a new sound system, a great book to read at night… I have spent countless hours scouring the internet for these things. But they are not essentials. Therefore, taxing discretionary items will not have regressive effects, but instead, progressive ones, that is, it is the middle to high-income earners who buy these purchases who would be affected. Perhaps, rather than broadening the base of the GST or increasing it full stop, the government could consider this revenue raising initiative which will not affect our lowest income earners.
There is a question, although, of whether spending habits of online shoppers would change with a decrease in the threshold. Mastercard Australia inspected this, and found that only 18% of shoppers would be likely to shop locally if GST was charged on their online orders. 86% of consumers prefer to buy online because it’s cheaper. But with many products, even a 10% increase in the overseas price may still outmatch the Australian price. For instance, a Revlon lipstick costs $25.95 in Australia, $15.09 in the UK and $7.89 in the US. That is more than a 10% difference. 62% of customers shopped online for the larger range of goods. There are many goods and services that we can’t buy here: if you want them, you have to buy online. Therefore, you are likely to buy even with GST; the demand for these goods are inelastic. It is unlikely there will be a substantial change in consumer habits or preferences; therefore tax revenue will be high.
There are still implications if this were to go ahead, though. In 2011, the Productivity Commission concluded that removing the threshold could produce $600 million in revenue, but create over $2 billion in costs for the government and for businesses. The costs incurred would include hiring of additional customs staff (to examine all incoming parcels) and additional Australia Post staff (to help customers to fill out appropriate tax forms) and hiring extra storage space for parcels while the customer’s tax forms are being processed.
So, what is the best way to move forward? While there may be problems with no GST threshold for online orders, perhaps decreasing the threshold may have an effect. California has targeted online purchases, so has the UK and Canada. Obviously, if the government is concerned with balancing the budget, other measures must be taken as well. But perhaps the online threshold is a good place to start.
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