Why it’s time to hike the GST and levy an inheritance tax 170



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The government’s recent budget outlook (MYEFO) confirmed that the Australian government budget is rotten at the core.

The government is hopelessly living beyond its means, with expenditure greater than revenue and debt ballooning throughout the next decade and probably beyond.

The government’s debt is our debt. A technical point: this would not be true if we were a closed economy without recourse to foreign borrowing, in that case the government would be borrowing from us. But Australia is very much an open economy with easy access to foreign credit, and we’ve been using it. This means we face higher taxes and weaker government services (health, education and so on) in the future unless we start living within our means.

Feasible spending cuts will not be enough. We must find more tax revenue in a way that is fair and does minimal damage to incentives to work, save and invest.

The Organisation for Economic Cooperation and Development (OECD) has just released its Economic Survey of Australia which points out what just about everybody except for Australian politicians knows: we must increase the GST.

Australia’s GST rate is one of the lowest in the world. New Zealand has 15 per cent, the UK has up to 20 per cent for example.

Here are some ballpark numbers from the recent MYEFO. The GST revenue in 2015 is expected to be A$54 billion. The budget deficit is A$44 billion. So if we increased GST revenue by half we would wipe out more than half the budget deficit. Roughly the same amount of revenue could be achieved by increasing the GST rate by just two per cent to 12 per cent and removing most of the GST exemptions on health, education and financial services which together cost, in lost revenue, A$11 billion in 2015.

A higher GST is not necessarily unfair, especially if it’s combined with higher taxes on the wealthy (which I’ll get to below). A tax that seems to hit low income people is not so tough when you take a lifetime perspective or consider people living in households.

Low income people are often young people with good lifetime income prospects, like university students. Yes they pay more tax now, but they benefit when they are older as the GST takes a lower proportion of a higher income. Also, low income individuals in Australia, including students, are almost as likely to be in a high-income household as in a low-income household.

Sending the right message

The GST does less damage to incentives to work, save and invest than most other taxes, such as income tax which discourages work and saving, and stamp duties which discourage people from moving to places where there are better job opportunities, and payroll tax which is a direct tax on employment.

The GST can also help to insulate tax revenue from an ageing population, since fewer workers relative to consumers means less labour income relative to consumption. Consumption will be a more stable tax base than labour income in the coming decades.

An increase in the GST would have to be accompanied by higher taxes on wealth, for the sake of fairness and hence political success.

One option is an inheritance tax which a number of countries have in one form or another including the US, the UK and a number of European countries.

One problem is that a pure inheritance tax may not generate much revenue based on current asset holdings of older Australians. Total net wealth of Australian households aged over 75 in 2012 was a little over half a billion dollars, according to the Australian Bureau of Statistics. This is a very small base from which to collect revenue. However our existing capital gains tax is a kind of defacto inheritance tax, and it could be changed.

Currently, capital gains tax concessions on the family home and other assets cost, in lost revenue, in excess of A$20 billion, according to the latest MYEFO. So, combining an inheritance tax with a tightening of capital gains tax concessions could wipe out a significant proportion of the current A$40 billion budget deficit.

Inheritance taxes could deliver more revenue in the future when the current baby boomers die, as they have seen their asset values – housing and superannuation – rocket over the past couple of decades. And many of these baby boomers are probably also receiving large inheritances from their elderly parents. Such windfall increases in wealth tend to discourage labour force participation – exactly the opposite to what we need given our ageing population.

Importantly, an inheritance tax does relatively little damage to incentives to work and save. This is because we don’t know exactly when we are going to die or what our medical expenses will be in old age. This uncertainty leads many people to “over-save” in the sense that they die with wealth that they thought they might need for further old age expenses. This part of a deceased person’s bequest is unplanned and therefore taxing it after death cannot distort incentives to work or save during one’s lifetime. Of course an inheritance tax must be accompanied by a gift tax to prevent offloading of wealth on one’s death bed.

There could be exemptions for the first million dollars of the family home for example, and then the remainder taxed at either a fixed rate or a rising rate according to the value of the estate.

All of this would seem to fit well with the ethos of Labor and the Greens. So a package of higher GST and higher taxes on wealth might actually get through the Senate.


What do you think? Should the tax be raised? Let us know in the comments below. The Conversation

This article was originally published on The Conversation.
Read the original article.

Ross Guest

Ross Guest is Head of the Department of Accounting Finance and Economics and Professor of Economics at Griffith University. He is an Adjunct Professor with the Australia and New Zealand School of Government (ANZSOG) and a National Senior Teaching Fellow with the Australian Government Office for Learning and Teaching.

  1. That maybe good for the federal government, but W.A doesn’t get theirs back… We support other states.

    4 REPLY
  2. Firstly as Costello said, The Liberal Government does not have enough Political Capital to make these changes and go to the next election without being decimated. Secondly Abbott has tried to force the States to do it..that has failed all State premiers must agree. the OECD also said
    The government’s plan to remove the link between the age pension and wages would cause its value to drift down in relation to average incomes, Mr Hemmings said. At some point it could “cross socially acceptable limits of adequacy”. But I agree with an inheritance tax, the wealthy should pay their fair share..alive or dead

    3 REPLY
    • Libby, there was an inheritance tax yrs ago. The government got more than The beneficiaries. That’s stupid. It was wrong then And it’s wrong now

  3. they would not have the guts to change the GST, and they can’t!! All the states must agree. The OECD also said The Government should NOT do these budget cuts to the old, the sick and the poor.

    1 REPLY
  4. If and when gst is increased it will be just after an election by a govt that holds a good majority in both houses. Otherwise politicians are too afraid of losing their cushy number to dare

    1 REPLY
  5. The problem is that our government gives too many handouts.

    7 REPLY
    • Especially to sacked politicians.A politician is sacked when they are voted out at an election.

    • they are sacked !! if they are voted out..it means they no longer have a job in Parliament. Look at Howard, he even lost his own seat as well as Government.

    • I think that the politicians could cut their wages by 50%. Hair dresser allowance off. Travel by 40% . no more refugee camps no more free houses medicals education to them. No more soldiers or equipment overseas .cut the GST down to 6% no more art galleries etc

    • You are right Linda but we need the politicians to lead by example. If the community sees them tightening their belts, the pain in the community doesn’t hurt as much.

    • And you never know Heather if and when you will need one of those handouts. My friend’s business went under, had to sell the house, and is now very grateful for a handout from the government and a house to live in. Hopefully it will be temporary but is finding it hard to get a job at over 55.

  6. 3 REPLY
    • They wouldn’t go to another country, the resources are here, and most other countries tax them. Even if they did leave, when they don’t pay tax, just strip Australia of resources and send the money overseas, what have you gained? The australia institute has figures that you might want to look at that shoes mining only emits between 1% and 2% of our workforce.

    • That’s The liberals for u. Take it from The old and poor and give It to their rich friends!

  7. We are shackled by an overly generous family assistance scheme and politicians who think tax reform must always mean tax reduction.

    6 REPLY
    • The biggest mistake Howard ever made was handing out these Baby Bonuses, and family welfare, it is not good for the country and these people need to learn that if you bring a life into the world..you must support it yourself

      1 REPLY
      • I agree – they could cut many family entitlements, as well as cutting politicians pay, allowances and entitlements, stop tax avoidance things like family trusts, make companies pay their proper share of taxes rather than sending money overseas, stop buying planes that do not work, before increasing the GST which hits low income earners, the old, etc., far harder than the rich. I have no problem in paying my fair share of taxes in any form but I do not see other people and organisations doing the same.

    • I agree with family assistance but not at the levels in place. There is also no requirement for Associated Entities to be considered in looking at income levels. Income is left in companies so that personal taxable incomes come in under the threshold despite families having access to additional funds from the company. A serious flaw.

    • Australia needs new generations to continue to exist. these babies grow up and support all of us eventually with their taxes. Even those who chose not to have children

    • So our government won’t make the decision to raise the GST BECAUSE it will be the end of their government. So our government will only make decisions to keep itself in government. Am I the only one who sees a huge problem with this situation! I thought our government was there to look after our country not to keep themselves in power !

    • they won’t stay in power Dianne, they have lied to much and Australian’s have stopped trusting and listening

    • Yes, we got nothing when we had our kids. Howard gave unmarried mums all this money for the vote. Now ABBOTT attacks us who are supposed to get their pensions. He Has particularly attacked and taken it OFF us born in The 50’s. The baby boomers yesterday. There r a lot of us due for pensions NOW. He won’t pay them, so he is making us work till we drop dead. Pig

  8. And still the poor man pays and pays and pays while thw top end of time blame everyone else for the pooor governance of the Abbott team

    3 REPLY
    • peter the top 5% of taxpayers pay 67% of the tax take in australia the bottom 95% pay 33% and most get more back in benifets than they pay ..so 95 5 ARE RIDING ON THE COATTAILS OF THE RICH …LETS TAX THE RICH MORE .


    • Oh, u must be rich. U are ridiculous. There are so many ways for businesses and rich people to get away with paying barely any tax that it’s not funny. Riding on coattails of the rich? U moron. Try living on $200. Pw and at 60 being told u now can’t have the pension that u worked so hard for All ur life and also being told to go back to work until ur 69! Typical rich people like Howard and ABBOTT

  9. Australia has one of the highest upper income tax levels and one of the lowest GST rates, so their is ample scope for tax changes, but as Leanne Stephenson points out, all the states have to agree to a change. There are 2 aspects to a tax change. A simplified but increased GST to replace all other forms of taxation (including income tax, company tax etc etc) and a very clear and unambigious law that requires that everyone and every company etc pays the tax without exemptions, deductions, tax-free allowances and so on. I’m tired of paying tax while others (usually wealthy companies and individuals) with good accountants pay nothing or very little.

    8 REPLY
    • They wouldn’t have to raise it if everyone paid their fair share- except for the massive debt hanging over everyone’s head. Read Lesley Goodge’s comment below. I read

    • Agreed we have high upper income tax levels, the problem there is that they will undoubtedly be generally claiming GST exemption. We need a system where everyone contributes, not just the average worker, the problem is that the political will to do as you suggest is not there. So if the gst is increased, the same old rules will apply!

    • Spare a thought for those who are still too young to get the pension, can’t get Newstart, so have to self-fund their own retirement on what savings they have. We get nothing! So yes Tax the Corporates and those tax dodgers!

    • The problem with this idea is that the tax increase on the poor is disproportionate. If you earn/get $300 a week a 5% increase on the price of everything is a lot. For someone earning $2000 + the effect is offset by a reduction in income tax. Sounds like Liberal Policy Tax the poor not the rich. An increase in GST is probably justified but so is making big business pay its correct and fair share of tax.

  10. One term Tony and Co have made a real mess of the economy.
    Unemployment highest in 12 years.
    Budget out of control, why? No revenue…..
    Silly mining tax, 9 billion per Year lost from the budget.
    Once again the workers and pensioners cop it, to cover their arses.

    3 REPLY
    • Can not blame the govt for unemployment. If I had a manufacturing business it would be going off shore too. Wages too high to make it profitable.

    • you can blame the Government when they are putting people on Newstart, people from the car industry and car parts manufacturers and loads of public servants and so many more including staff from the ABC . None of these people will pay taxes now, instead they will be on benifits

    • car industry that was good shana labour was handing them 50000 for every employee they still could not make a profit .dont talk to me about govt looking after the big end of town GMH FORD TOYOTA ALL GIVEN MILLIONS BY RUDD AND GILLARD NOT ONE WHIMPER .FROM YOU THEN ..

      1 REPLY
      • Subsidies for the car industry are not the exclusive domain of Rudd, Gillard or any other PM. It was happening for decades, under Governments of all colours.
        Most likely for as long as the car industry existed in this country, so please don’t try to make it sound like it was an exclusively Rudd/Gillard policy.
        That is as misleading as everything else I’ve heard from this sorry lot in Canberra lately.

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