Pat Hession from the Drive program on 630 ABC North Queensland interviewed me this afternoon on the merits of increasing the GST rate and broadening its base to include exempt items such as fresh food. I noted that, from an economic point of view, having a broader GST base is better because it is less distortionary than a GST with exemptions. Also, you could raise more revenue that would allow you to reduce other taxes that are less efficient than the GST (see my previous post Inefficient State taxes which reproduces a nice Treasury chart showing how inefficient different taxes are).
By broadening the base, we could probably increase the GST take by around 20% or $10bn per annum, which, because the GST flows to the States, would massively help Queensland’s budget, assuming we got around $2 billion of the increased revenue. If we increased the GST rate as well, we could raise a lot more money.
Of course, one major problem with the GST is that it disproportionately affects low-income earners who spend a higher proportion of their incomes, in general, and spend a higher proportion of their incomes on food, in particular. So a GST base-broadening and/or rate increase would be inequitable, so we’d probably need to increase the tax-free threshold and boost pensions and unemployment benefits to compensate people.
Obviously the GST is a difficult political issue, but, given the large potential economic and fiscal benefits from GST reform, it should certainly be considered as a possible policy option for the incoming Federal Government after the September election. That said, it should only be considered as part of a thorough review of all tax and expenditure items to ensure that we’re only being taxed for necessary and desirable expenditures, and that we raise tax revenue in the most efficient way possible. Given the GST is a relatively efficient tax compared with income tax and company tax, consideration should certainly be given to changes to the GST.
For anyone interested in reading further on the GST debate, I recommend this excellent piece at the Conversation by my former colleague and co-author Professor John Mangan: