Is the only good tax an old tax? A historical perspective on the GST debate

Abstract

This paper critiques the arguments put by the Howard Government for an unadulterated, flat rate GST policy, by taking the characterisation of the current wholesale sales tax (WST) as an outdated tax without design or logic, and showing this view to be historically wrong and superficial. It does so by exploring the social reasoning adopted politically in constructing and evolving the sales tax, and its interaction with other taxes. It posits a ‘benevolent government’ interpretation of tax design to contrast with the Treasure ‘rent-seeking’ model, and examines the rationale for exemptions and multiple rates in historical context. It also asks whether economic change since 1930 does make the WST irrelevant to current conditions, as the Government has asserted. <P> The narrowness of the present sales tax base mainly reflects design decisions in the 1930s and 1940s. These aimed at limiting the burden on families with children, the poor, and other vulnerable groups through exempting essential expenditures. Exemption such as food from sales taxation reflected strongly held social values having bipartisan political acceptance. These values included ‘progressivity’, but also encompassed other conceptions of ‘fair’ taxation. Unless there have been major changes in public attitudes to what constitutes ‘fair’ taxation, this implies the GST as presently proposed may not improve Australian’s social welfare, and may not be politically viable in Australia. <P> The consumption tax base has declined substantially in relation to GDP since 1930, reducing the WST’s potential yield. However, a GST would have been similarly ‘eroded’. Only since the 1980s is the growth of services a significant argument for consumption tax reform. <P> Tax reform is disruptive and costly. Benefits in terms of equity and efficiency gains must be reliable as well as substantial to make a valid case for change. If the ‘rent-seeking’ thesis for the WST’s narrow base prevails, and the GST taxes food to avoid encouraging ‘rent seeking’, tax reformers must show how their ‘unadulterated’ GST revenue base is protected against the lobbying which supposedly corrupted the WST. <P> Likewise, unless the GST is a Trojan horse for achieving undeclared changes in the distribution of income, its proponents must show how the GST compensation package prevents an ‘unadulterated’ GST worsening present inequalities of income, not just beyond the next Budget but over the next several decades as the GST rate rises and/or Budget programs are pared back. <P> On both these grounds, exemptions for food might best be included in the design of the GST as part of the tax reform package.