GST, Banks Must Feature In Tax Reform Debate

ANY DISCUSSION OF TAX REFORM in Australia must — almost by definition — include revisitation of the scope and rate of GST, and the attendant prospect of steep cuts to direct taxes; rank populism by the ALP (which modelled a GST hike in government and now claims such a change to be a “breach of faith”) should be disregarded, as long-term structural considerations are placed above ridiculously destructive partisan politics.

I have been reading a very good opinion piece in The Australian this morning, which neatly sums up both the challenges facing Prime Minister Tony Abbott in any contemplation of the GST as part of any wider attempt at tax reform, and the rank opportunism of the ALP (and some of the states) that such a discussion has already provoked.

I have to keep this circumspect today, as I am — as readers already know — quite busy at present, but there are nonetheless some key points I should simply get onto the table.

The most obvious of these is the fact that of all the taxation options available to the government (and with an eye to the escalating and recurrently growing demand for revenue by the federal government sector), the GST stands almost alone as a mechanism capable of delivering an expanding growth stream of taxation revenue.

Hot on the heels of this is the revelation, widely reported in yesterday’s press, that the ALP itself commissioned Treasury modelling in office to observe the effects of a modest GST increase of its own, raising the rate from 10% to 12.5%.

Such an increase, in my view, does not go far enough: the switch in the “tax mix” from taxes on income to taxes on expenditure is both urgent and critical, as the share of government revenue contributed by income taxes continues to fall over coming decades as the workforce ages, shrinks, and casualises.

And contrary to the deepest desires and ideological dogma of the ALP and (especially) its bed buddies at the Communist Party Greens, simply hitting “the rich” ever more heavily to try to claw back the difference is counter-productive and will also prove self-destructive in the longer run.

In his article, Paul Kelly hits the nail on the head, and his summation of Labor’s mentality on this question — that merely seeking public consent and/or seeking to engage in a comprehensive and rational debate about GST reform is a “breach of trust” — could as easily apply to the ALP approach to virtually any area of government that requires overhaul, and which Labor in power, despite the robust position it inherited, mostly squibbed.

For mine, a GST rate of 20% applying to everything aside from medical treatment — with accompanying steep cuts to income tax scales, along with boosts to pensions, and perhaps a further lifting of the tax-free threshold and/or the absorption of fuel excise collections into the GST net — makes perfect sense. This, and any options for GST reforms up to and including this position, merit consideration at the very minimum, irrespective of whether they are subsequently adopted or not.

But in the current, toxic political environment — in which even the consideration of raising one tax is used as a crude populist battering ram, irrespective of any potential offsetting measures — such a debate seems unlikely to eventuate, and it will be Australia that will be the worse off for it.

A simple measure of this contention will lie in the fact that comments to this column, if they follow past trends, will simply ignore my own advocacy of cuts to marginal tax rates and increases to social security payments, and simply pillory me for arguing that a doubling and broadening of the GST should be contemplated at all.

Some who come here looking to sink the boot into “Tories” may resist the urge to engage in such blinkered abuse. I will believe their restraint, quite literally, if I don’t see the evidence otherwise.

 

AND ANOTHER THING: readers have been surprised in the past to find this column — usually devoutly liberal in its economic views — advocating for a windfall tax to be applied to profits generated by the banking sector.

There is a difference between a free market returning healthy profits and plain, old-fashioned price gouging, and any group of four companies that cumulatively reap after-tax profits equivalent to roughly 5% of the country’s entire GDP demonstrates the shortfalls of prudential regulation that singularly ignores the difference between the two.

With Australia’s so-called “big four” banks hauling in clear profits of about $75 billion last year, the problem has gone beyond a joke; the retail banking sector uniquely defied the Global Financial Crisis to record consistent profit growth — in part, due to government intervention and monies expended by the Rudd government — and largely off the back of a fees, penalties and charges regime that is not grounded in any reflection of the true costs of providing these items.

This column repeats its assertion that a windfall tax should be applied to all profits recorded over a nominated threshold — say, $5 billion per annum per “banking group,” to remove the incentive to spread black ink through a plethora of subsidiaries — and levied at 50% of all revenues above that level.

Such a tax would raise about $40 billion based on last year’s figures, and whilst its yield would fall if met with cuts in banking charges in response, the measure would nonetheless deliver a win for consumers as it restored money pried from their pockets one way or the other.

$40 billion buys a lot of health and education funding, repays a fair whack of government debt each year, or funds quite a slather of other worthy government expenditure that currently eludes reality.

 

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One thought on “GST, Banks Must Feature In Tax Reform Debate

  1. I think there is a lot of scope for changes to the tax system including the GST. Any type of super profits tax is problematic for a whole host of reasons. How much profit is too much and which businesses should be liable for such a tax?
    The failed Mining Super Profits Tax didn’t just fail to raise any money, it was also responsible for the loss of hundreds of billions of future mining investment due to the increase in investment risk.
    The idea our banks are making too much money is a very popular and enduring idea. Last year CBA made a profit of some 8 billion and also paid 3 billion in tax. At the same time, BHP made a profit of around 9 billion US. Should they pay a ‘wind-fall’ tax as well?
    If you use ROE or return on shareholder’s investment in the business as a measure of profitability, none of the big four banks feature in the top 50 companies on the ASX. The best performing bank, CBA has a ROE of 18.08. Amongst the top ten are: CarSales.com 60.34. Dulux Group 50.33. Fortestcue 47.7. Seek 40.81.
    Our banks are strong and profitable but are certainly not making super profits.

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