Gavin R. Putland,  BE PhD

Wednesday, May 22, 2013 (Comment)

You can increase the GST without raising prices

(P.S.: See also Maximalist ‘fiscal devaluations’ for Greece and Australia.)

Gavin R. Putland writes: Re. “Sudden outbreak of responsibility from both parties on budget” (Monday). The GST has been “a no-go area for both sides” (as Bernard Keane put it) because of the perception that raising the GST would raise prices. Whether that perception is true depends not only on which existing taxes would be replaced, but also on how they would be replaced.

For example, when it is said that replacing personal income tax by additional GST would raise prices, it is assumed that the PAYG personal income tax currently withheld by employers would instead be paid out in gross wages, so that the business income needed to pay the extra GST would need to come from elsewhere, namely higher prices. But it doesn't have to be done that way. If PAYG personal income tax were retained by employers — while employees continued to receive credit for it as if it had been paid to the ATO — it would be made available to pay the additional GST. In the aggregate, no extra business income would need to be found, so there would be no rise in prices of goods and services produced in Australia. Neither would there be any reduction in after-tax wages or any widening of after-tax wage inequalities.

So why is this worth doing? Three reasons. First, PAYG personal income tax would be subtracted from the cost of labour as seen by employers. So there would be more jobs and better job security, hence more domestic demand for Australian products. Second, the GST, unlike the cost of labour, does not feed into export prices, so there would be more foreign demand for Australian products. Third, because the extra jobs would reduce welfare spending, not all of the lost revenue from PAYG personal income tax would need to be replaced (hence there would actually be a slight FALL in prices in the domestic market).

The only downside for consumers is that the higher GST would apply to imports, but that price is worth paying for the extra job opportunities, and in any case would be partly offset by the currency adjustment.

The big political question is whether an Abbott government could be trusted to increase the GST in the price-neutral manner, and not the conventional price-raising manner. I seriously doubt it. The powers behind raising the GST probably want the reform to be regressive. It's hard to avoid that impression when they advocate using GST revenue to replace land tax, and back it up with the patently absurd claim that land tax is regressive.

Greater reliance on consumption taxes would be worth voting for if it were done right. But it is more likely to be done badly.

[Letter in Crikey — as published, except that I have undone the editing of the third paragraph and added a link.]

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