CPA Australia says Government should examine lifting GST by 2020 to strengthen economy

The Government has made it clear that an increase or broadening of the goods and services tax is not on the agenda for its tax forum next month. But CPA Australia says the Federal Government should commit to taking the issue to the states and territories, with a view to lift the GST rate to up to 20% over the next decade to help prepare Australia for the Asian century.

The accounting body commissioned KPMG Econtech to look at the likely impact of including more goods and services under the 10% rate, and increasing the level to 12.5%, 15% or 20% to compensate for the removal of inefficient taxes such as insurance taxes, motor vehicle taxes, commercial conveyancing duty and payroll tax.

It found that “there are likely to be positive impacts on the economy if a relatively more efficient tax, such as GST, is used to abolish existing taxes that are less efficient.”

“Under each scenario, the tax reforms would lead to an overall higher standard of living. This is because the costs of imposing the GST are smaller than the benefits of abolishing the inefficient taxes,” the report says.

“Where there is still additional revenue remaining from the higher GST rate after abolishing the inefficient state taxes, the extra revenue is used to fund other tax reductions and to address equity concerns,” the report says.

“Specifically, this additional revenue is used to reduce company income tax rate, the tax rate on the top bracket of personal income tax and as a transfer payment to households.”

The report found that:

• Broadening the 10% GST rate so it covered health, fresh food and education, for example, would raise about $11.5 billion, which could then pay for the abolition of insurance taxes, motor vehicle taxes and 50% of commercial conveyancing duty. The report says this tax reform “leads to annual consumer living standard that are around $4 billion higher than otherwise would be the case.”
• Lifting the GST rate to 12.5% would raise sufficient revenue (about $10.5 billion) to pay for the abolition of insurance taxes, motor vehicle taxes and 10% of commercial conveyancing duty. “Such a reform is estimated to result in annual household living standards being $1.6 billion higher than would otherwise be the case,” the report says.
• Hiking the GST rate to 15% would also replace all commercial conveyancing duty, and 40% of payroll tax, the report found, with annual living standards estimated to be $4.7 billion higher than without any reform. In addition, the report says the complete abolition of commercial transfer duty reduces the tax-related disincentive to invest in commercial property, and the reduction of payroll tax has flow-on effects to higher real wages.
• Increasing the GST level to 20% would be enough to fund all the inefficient state taxes mentioned, as well as allow for a 1% reduction in company taxes and personal income tax. “The reduction in inefficient taxes leads to a gain in living standards that is higher than the loss from raising the rate of GST to 20%. Overall, there is an annual gain of $4.6 billion,” the report says.

CPA Australia business and investment policy head Paul Drum says the accounting body commissioned the study on the eve of the tax summit because it believed the GST level was an “untold story” after the Henry Tax Review.

“There’s no love for an increase in any political centres, which is understandable.”

“But CPA Australia’s view is that if we are going to ensure that we have a strong position economically in this Asian century, we have to tackle some of the really hard decisions about how to make the tax system more efficient and increase our competitiveness.”

“And the modelling shows that by retiring inefficient taxes, you have a positive impact on GDP.”

“The first step would be for the Government to put it on the agenda at COAG.”

Drum concedes that widening or increasing the GST base would hit some sectors – education, fresh food and education in particular – harder than others, but says it is not beyond human capability to design a package with “appropriate levels of compensation for those who don’t work, pensioners, self-funded retirees and appropriate personal income tax, to ensure that the cost of living isn’t disproportionately pushed on to consumers.”

He adds that Australia is under-reliant on GST as part of its tax mix (the OECD average for goods and service taxes is 15%), we are facing an ageing population who will be paying income tax but will still be consuming, and the GST is already bedded down, meaning most of the hard work has been done should it need to be tweaked.