Australia is aging and needs a GST overhaul

Taxing our Children? (Getty/Ian Waldie)

Australia’s bureaucrats, like the rest of the country, are getting on, with 44% of the federal public service eligible for retirement in the next decade.

That’s a nice easy way for the government to shrink the public service, but it’s a measure that is indicative of the aging workforce in Australia according to Karen Evans, managing director at NGA.NET, a top talent management company told Business Insider.

An aging population means less workers to support retirees.

That means that the Australian taxation system, which is more heavily reliant than its OECD peers on personal income tax, will struggle to deliver the revenue to government to provide services that Australians expect – both during their working life and in retirement.

According to a new report by KPMG, commissioned by CPA Australia, that means, “ongoing structural and demographic changes in the Australian economy are leading to a
decline in the income tax revenue base”.

The report says:

This suggests the need for a shift from a reliance on direct (income) taxes to a greater focus on indirect (consumption) taxes. A more sustainable revenue base will provide more fiscal headroom for financing the cost of an ageing population and for funding compensation for households that may face additional costs under the reform.

Raising the GST is contentious enough an issue in Australia without broadening the base to things like fruit and vegetables.

But, a discussion needs to be had and some leadership shown CPA Australia chief executive Alex Malley told Marius Benson on ABC Newsradio today.

Maley highlighted the fact that while the idea might be contentious the amount of money raised meant that those in the lower income quintiles could be compensated by a redistribution of the revenue from the government to redress any imbalance. Indeed the report notes, ‘The personal income tax system can be used to redistribute additional GST revenue.” Additional redistribution outside the system is likely also needed the report says.

Key to the CPA’s argument is that the Australian tax system, given changing demographics is not only likely to become unbalanced but it is already outside what the OECD would suggest was best practice for a taxation system.

The Australian economy has one of the lowest GST rates and one of the highest dependencies on income taxes in the OECD. Further, a significant proportion of the goods and services in Australia are GST-free (including food, health and education). This means that there is the capacity to broaden the GST base and/ or lift the tax rate, and use the additional GST revenue to fund the removal of other, more inefficient taxes.

CPA Australia is canvassing 4 scenarios for the changes:

  1. 10% GST on a broader base – extending the GST coverage to include fresh food, health and education. In 2015-16, this is estimated to raise an additional $12.1 billion in GST revenue. This additional revenue is used to abolish insurance taxes, stamp duty on motor vehicles and a small proportion (9 per cent) of conveyancing stamp duty. Any remaining additional GST revenue is returned to households through personal income tax cuts and welfare payments.
  2. 15% GST with current exemptions – increasing the statutory rate of GST to 15 per cent. In 2015-16, this is estimated to raise an additional $26.0 billion in GST revenue. This additional revenue is used to abolish insurance taxes, stamp duty on motor vehicles and 80 per cent of conveyancing stamp duty. Any remaining additional GST revenue is returned to households through personal income tax cuts and welfare payments.
  3. 15% GST and applied to health and education – increasing the statutory rate of GST to 15 per cent and extending the GST coverage to include health and education. In 2015-16, this is estimated to raise an additional $36.8 billion in GST revenue. This additional revenue is used to abolish insurance taxes, stamp duty on motor vehicles and all conveyancing stamp duty. Any remaining additional GST revenue is returned to households through personal income tax cuts and welfare payments.
  4. 15% GST on a broader base – increasing the statutory rate of GST to 15 per cent and extending the coverage to include fresh food, health and education. In 2015-16, this is estimated to raise an additional $42.9 billion in GST revenue. This additional revenue is used to abolish insurance taxes, stamp duty on motor vehicles and all conveyancing stamp duty. Any remaining additional GST revenue is returned to households through personal income tax cuts and welfare payments.

The report finds that that all changes have a net positive impact on economic growth through time.

Australia’s population is aging. We’ll have to pay the piper at some point.

CPA Australia is just trying to start a debate Australia has to have.

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