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Don't succumb to the GST BS! Here's what you should know

Peter Switzer
6 November 2015

PM Malcolm Turnbull is playing around with his cute and cuddly reputation by bringing up the awful subject of GST! I know real leaders have to come up with real achievements, based on having followers who believe in them, but a GST is not an easy thing to sell, while winning friends and influencing people.

Since the new Government has shown an appetite to improve the tax mix (and that means discussing thorny subjects, such as making possibly all goods and services come with a 15% GST at its worst or, at best, making the exempted goods and services have a 10% GST), the media has become tax obsessed!

But they’re way under-informed on the subject so they fall into any story, especially if it comes from some body with a sophisticated name, such as the National Centre for Social and Economic Modelling. These Canberra-based guys are good at what they do and, this week, Labor and lefties in the media ran with their latest work, which said a 15% GST would hit poor households the most and be best for wealthier Australians!

How could they know that? Well, you could say they’re better with numbers than most of us but still I’d say — how could they know that? You see, economic models that give answers or outputs rely on the inputs and, right now, we don’t know what kind of GST, income tax changes and other welfare spending changes will come with a future GST.

Models like the one used by the mob above have to rest on assumptions that could be wrong. The PM is talking about fairness with a GST and has defined it as happening when “the tax is borne by the people best able to pay.” This sounds like the kind of thing a smart politician would say when he’s trying to flog a GST that could be like a dead horse! (I’m really happy I didn’t have to make reference to gallant old Red Cadeaux, which ran his last race on Tuesday!)

Back to Malcolm’s tax challenge and I told a radio personality and his audience that we don’t know what kind of GST the PM is running with. We don’t know the compensation or what the State Premiers will want out of the rising tax rate and we don’t know the changes to other taxes, as well as the spending payments that could increase or decrease with a new and improved GST. In simple terms, it’s too easy to make a GST judgment call and I can’t see Malcolm running with a GST, unless we see:

  • Income tax cuts.
  • A lower company tax rate.
  • A return to taxpayers of the proceeds of bracket creep, which happens when inflation pushes up incomes (and us) into higher tax brackets.
  • Less silly little taxes that can be levied by say State Governments.
  • Other attractive carrots.

I know a thing or two about GSTs as I’ve written two best-selling GST books! The first (Who’s Afraid of the GST?) sold over 13,000 copies, which made it a business best seller at the time. This was pre-Federal election in 2000.

And then when John Howard got the tax up, my next book, GST: Your Questions Answered, sold over 130,000! I reckon that was an unbeatable business best seller for Australia and I’ve told ex-PM John Howard that he gave me the “tax I had to have!”

One guy who knows more about GSTs than me is Tom Seymour, who heads up tax for accounting firm PwC. Tom told me these things below about a GST and other tax issues. We all should know this ahead of Turnbull's eventual tax revelation. Consider this:

  • Our personal and corporate tax rates are among the highest in the OECD.
  • Our GST at 10% is one of the lowest broad based consumption taxes in the world.
  • Our mix is atypical of the type of growth-based tax system required to thrive in the modern world.
  • Since reforming its tax system in 2010, NZ has reported its first surplus in seven years and is projecting 4% growth over the next year. What did they do? They reduced personal taxes and increased the GST to 15% through a bi-partisan reform process.
  • PwC research shows that in just five years' time, bracket creep will cost taxpayers $45 billion through higher income taxes.
  • That's three times the cost of broadening our current GST to food, health and education at $13.5 billion and just under the cost of broadening and raising the GST to 15%, at $53 billion.
  • The reality is that not reforming the tax system will hurt more people than some of the proposed changes.
  • Seymour says if our tax system is better, we will attract more foreign investment, which means jobs, growth and a bigger tax collection, which then helps kill the Budget Deficit/Debt problem.

Seymour got it right when he told a conference this year that: “What's needed, right now, is a conversation with the whole community about why tax reform is the right thing to do. Not the right thing for one or two interest groups but the right thing for our nation as a whole. We have to demonstrate that by fundamentally reforming our tax system, every Australian will gain from the economic benefits that will flow. After all, that's what any 'reform' is ultimately about.”

That’s Malcolm’s challenge and he’ll have to fight members of a scared Labor Party, who can see that the PM is murdering Bill Shorten in the polls and a media mob, who love political blood spillage. A GST makes that so easy to pull off!

The PM must talk about income taxes, bracket creep, business taxes, state taxes, the GST, negative gearing, the capital gains tax discount, superannuation concessions and base erosion and profit shifting by overseas and even local companies.

“The panacea is getting the balance right between creating a tax system that is sustainable and sets Australia up for future growth and prosperity, whilst taking care of the most vulnerable members of our society,” Seymour wisely advised. And he’s right.

On the post-Budget day in Brisbane this year, Tom said a 15% GST could raise around $50 billion. You could then compensate the bottom 40% of Aussies with $12 billion, which means there’d be $38 billion left to bribe the States (my words not his!). And there’d still be plenty left to change taxes, such as company tax and even pay down some of the worrying debt.

I look forward to the tax and GST debate but I really hope Malcolm can pull it off. It won’t be easy but there could be another great book in this taxing subject!

(Nothing scary on Wall Street overnight but tonight, job numbers in the US could be a big market mover for next week.)

If you liked this article you'll love the Switzer Report, our newsletter and website for trustees of self-managed super funds. Click here for a FREE trial and to hear more of Peter’s expert commentary and advice.

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