Last week, I spoke with Ben Davis from 4BC about broadening the GST (see 4BC interview on KPMG’s analysis of GST increase for CPA Australia). Our discussion was pretty high-level, and there were many detailed issues we could have discussed further. For example, parents of students at private schools such as Brisbane Boys’ College (image above; see attribution below) would be significantly affected by any broadening of the GST. And the impacts may not stop there, as explained by Michael Willis in a guest post below. Michael is a Senior Advisor at Effective Governance Pty Ltd. He is also the Honorary Treasurer of Independent Schools Queensland. The opinions expressed here are his own.
Time for a Sensible Debate on Broadening the GST Net
The case for broadening the GST net needs to be carefully considered. The argument is that the GST would be more efficient and fair if applied more broadly, to include items that were initially exempted, such as food, school fees and health insurance. A supporting case is also made for some compensation for affected low income consumers. Much of the argument for this change has focussed on two policy dimensions – the fiscal aim of balancing budgets and the desire to equitably compensate for the regressive nature of the GST – but is in peril of ignoring a third and critical element, the need for an efficient taxation-welfare regime.
On the question of school fees, for example, NATSEM has estimated that extending the GST to school fees would raise an extra $790 million in revenue. However, we need to consider more broadly what might happen if school fees were increased for a ten percent GST.
This ten percent school fee hike won’t hit just the parents of students in the so-called “elite” schools. It will affect many families in outer suburbs and regional areas, who often battle to send their children to low-fee schools run by local church and charitable groups. Such a major impost will significantly affect the spending choices of these families. Some will opt out of private schooling altogether, sending their children to the public system. Others may choose a lower fee school, to offset the fee hike.
The Productivity Commission’s latest Report on Government Services 2015 shows that it costs governments an average of $6,891 more each year to educate a student in a public school than in a private school. That’s a whopping $8.7 billion that private schools save the taxpayers every year. Private school parents cover around half the cost of a child’s education through their fees. We also need to recall that, under the current needs-based funding system, the government subsidy for a student in a low fee private school is much higher than for one in a higher fee school. Higher fee schools have parents paying over 80% of their operating costs, with only a fraction of government help.
Therefore, every time a family switches to a public school, or to a lower-fee private school, it costs the taxpayer more in subsidies.
It is possible that much of the extra GST revenue on school fees would be offset by extra expenditure on both public schools and lower-fee private schools, as many parents would likely move their children out of higher-fee schools due to the fee increase. Exactly how much would be lost is unclear. But if ten percent of private school families switch their choice to the public sector, it could soak up much of the extra tax revenue. This doesn’t even take into consideration the extra cost and inefficiencies of wasted staff and other resources, underutilised buildings, and additional construction to accommodate for these changes.
As well as wanting to take their share of the extra GST revenue, state governments will be clamouring for more “Gonski” help from Canberra for their public schools. It is likely that the price signals on private school education would end up costing governments most of the extra revenue they might gain from a GST extension on school fees.
It has been argued that the GST impost could be offset by adjustments to school grants. One would have to wonder why any government would bother changing the GST, if there is no revenue gain for all the pain of a new tax. If schools are fairly compensated, then the original aim of raising revenue is lost completely.
Some advocates of the GST expansion are proposing there be some compensation for poorer families, but not for those on higher incomes, via the taxation system or the welfare system. They may need to rethink this view, for several reasons.
Firstly, we will end up with the same “price signal” problem identified above – parents will still choose to offset the school fee hike by switching schools, pocketing any tax cuts and saving the school fees. The net effect will be a minimal net revenue gain.
Secondly, they ignore the substantial equity adjustments already built into the “Gonski” funding for private schools. Such a major funding change (ten percent extra for every child) would require a rethink of the whole Gonski funding regime for the non-government sector.
Thirdly, it would be almost impossible to target such help to compensate the disadvantaged families. How would the tax-welfare system target a new grant that is only for private school parents with a certain level of family income, and with a means test adjustment? On the other hand, if it was done through direct school funding, how could you guarantee that the money went to reduce fees? It all gets far too messy.
Finally, there is a risk that this new tax will face the same mistakes as with previous efforts with new taxes. For example, when the carbon tax was introduced, broad and generous compensation measures were added as part of the sales pitch to voters. These compensations ended up costing far more than the revenues raised, backfiring badly on successive governments. We need to be careful that these attempts at revenue gains don’t end up as massive net redistributive measures that add to the tax burden or to our deficit.
Extending the GST to school fees sounds simple. However, it may end up costing the community far more than it raises or, at best, may cause significant problems in terms of both the equity and the efficiency of the tax-welfare system.
Michael Willis is a Senior Advisor at Effective Governance Pty Ltd. He is also the Honorary Treasurer of Independent Schools Queensland. The opinions expressed here are his own.
Attribution for image: “Main Building Brisbane Boys’ College 04” by Kgbo – Own work. Licensed under CC BY-SA 4.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Main_Building_Brisbane_Boys%27_College_04.JPG#mediaviewer/File:Main_Building_Brisbane_Boys%27_College_04.JPG