In response to a new report from CPA Australia (tax-reform-in-australia), the Prime Minister has ruled out changes to the GST, which is a bit of a shame, because changes to the GST should be part of any comprehensive package to reform the taxation system. As I mentioned to Ben Davis on 4BC radio yesterday afternoon, the KPMG analysis for CPA Australia is correct that there would be economic benefits from broadening the GST base or increasing its rate, and using the extra revenue to remove or cut less efficient taxes such as stamp duty or income tax. And the KPMG analysis is clever in that it shows how this can be done while not adversely affecting poorer households by funding increased welfare payments with some of the additional GST revenue.
However, I suggested to Ben that I have my doubts as to whether all extra GST revenue would be used for tax cuts or increased welfare payments in practice. Both the States (which the GST revenue technically flows to) and the Commonwealth (which could effectively take some of the extra revenue by cutting other grants to the States) would be tempted to use some of the additional GST revenue to fix their budgetary problems. Hence, households might rightly be suspicious of any move to change the GST. They understand that GST increases would increase prices, but the extra revenue might not necessarily be returned to them. This is unfortunate, as there would be much merit in having a greater reliance on GST for revenue raising, as I’ve previously noted: