The GST and the New Tax System
Since its first introduction four decades ago, three quarters of the countries in the world have instituted a GST-style consumption tax, all featuring major exemptions for particular goods and services. Australia followed suit with its own Goods and Services Tax in July 2000, which passed into law with Coalition and Democrats support. With Labor now also committed to keeping the GST, the political debate is now focussed on what further exemptions and fine-tuning is needed.
The Democrats entered the tax reform debate because our tax system was deteriorating fast. The old wholesales sales tax was taxing goods only, off a narrow base, it distorted business investment decisions, disadvantaged exports, and was not growing with changes in the economy. The tax system had not been raising sufficient revenue to fund public needs in health, education, and community services, and was not taxing equitably.
In 1998, the Democrats released a three-pronged pre-election tax policy on how to fix the tax system to ensure that the revenue stream was adequate, on how to make it fairer, and on how to keep it growing with the economy. The Democrats October 1998 election tax reform platform outlined the limited basis on which we could accept a modified GST, calling for major exemptions for food and other categories, and for stronger environmental and social outcomes. The Democrats were also the only party that went to the 1998 Federal Election with the policy of a real increase in pension rates.
Our policy set our preferred tax system – one where tax avoidance was minimised and where environmental taxes were more prominent, and our response to the Coalition and Labor tax reform policies. Our response to the Coalition said we would oppose the Government's model of a GST, but would not oppose it if the GST tax reform package could be made economically environmentally and socially responsible.
Supporters of the New Tax System, including the GST, argued that it would deliver a better, more secure, fairer and more competitive funding flow both for the Commonwealth and the States, than our previous tax system. They also believed it would enhance exports, increase efficiencies, and remove distortions in the economy.
After the 1998 election, the Democrats subjected the Govern-ment's tax package to an extensive seven month Senate inquiry that received over 1700 submissions from the public and indus-try. In May 1999, armed with the reports of Senate inquiries, we decided to negotiate the Government's New Tax System and GST.
The Coalition proposed extensive GST exemptions for dwelling rentals, health services, education, financial services, and exports, totalling over 20% of GDP. The Democrats agreed with those exemptions and then broadened them to include basic and fresh food plus extended exemptions to the health, education, and charitable services sectors. (Most GST/VAT systems in the world also treat food concessionally.)
In the end, the Government was forced by the Democrats to agree to:
While not perfect, the Democrats' changes represented significant improvements on the social and environmental front from the original package. On the compensation side the Democrats had secured a 4% GST supplement indexed to the CPI and the first real increase in aged pensions since January 1993 through a 2% rise in real terms in social security allow-ances. We secured a reduced taper rate on private income down from 50% to 40%, benefiting around 800 000 part pensioners. We extended the self-funded savings bonus from age 65 to age 55 at a cost of $180 million. We raised the increase in rent assistance from 4% to 10% at a cost of $66 million.
Nevertheless the GST itself dominated the reaction to the whole package. The issue again proved divisive, not only in the community but in the Democrats. Some Democrats felt the negotiated outcome did not go far enough and opposed the GST package as a result, exercising the highly-valued right all Democrat parliamentarians have to a conscience vote.
The requirement to implement the GST simultaneously with the New Tax System proved too much for the Tax Office. It failed to deliver the simplicity that was promised. By combining major changes to business tax arrangements, a bring-forward of company tax payments, a huge 'fishing expedition' for anti-avoidance information on Business Activity Statements, the introduction of the GST, the Ralph business tax reforms and myriad other tax and systems changes all from the same date, business compliance costs ballooned out, and complaints soared.
Implementation coincided with a declining business outlook and with the huge jump in international oil prices and the signifi-cant devaluing of the Australian dollar. Unhelpful and poorly timed increases in interest rates by the Reserve Bank exacer-bated matters. This was accompanied by a strong anti-GST campaign by Labor that wrongly sought to blame the GST for everything negative in the country, and contributed to a gloomy political and economic environment.
The Government and the Tax Office were too slow in responding to legitimate concerns raised by business and the public. The Government, in a grab for extra revenue, also broke key election promises in its post-GST setting of excise rates on petrol and beer. Eventually pressure from the Democrats and the community forced the Government to back down on over-onerous requirements for the BAS statement, and on petrol and beer excises.
On the positive side, the new tax system has achieved the objective that the Democrats wanted it has broadened the tax base and provided more secure funding for key State Government services such as health, education, roads and police. Access Economics predicts that the States will be up to $1.9 billion a year better off within five years, which is an awful lot of extra teachers, nurses and police.
Where to from here?
Labor's vague commitment to 'rollback' the GST appears to have fizzled. Labor, having run a campaign against the GST for three years, will now keep it with minimal changes.
The Coalition is likely to continue to try to reduce the paper-work burden on business, having belatedly recognised that the Tax Office needs real oversight in the detail of implementation and in the management of the GST and the New Tax System.
The Democrats will:
The Democrats recognise that all tax reform is 'work-in-progress' and we will continue to constantly review the system. #
TAXATION, FINANCE & CORPORATE AFFAIRS