GST is one of the most controversial laws in Australia. Despite the fact that this tax is one of the major sources of Australian treasury, many critics contend the idea that it has a regressive nature. To be more specific, they argue that this tax has larger impact on lower income earners, suggesting that in comparison with those, who earn larger incomes, this tax consumes proportionally larger share of income. The proponents of the GST in their turn rebuffed by claiming that in order to furnish adequate reimbursements for these categories of people, the government of Australia introduced a number of corresponding tax reductions in personal income taxation, local and federal banking taxes and some other taxes.
For more than ten years, the government of Australia has been maintaining this tax at 10%. However, the incumbent Prime Minister of Australia Malcolm Blight Turnbull recently announced an increase to 15%. According to the government officials, the rise of GST tax collections is justified by the exponentially growing expenses of the healthcare industry. To be more specific, deficit of the federal budget in 2015 reached $45 billion, of which $35 billion were attributed to the healthcare expenses (Taylor, 2015). To compensate the shortage of financial resources, the government of Turnbull considered many alternatives, but ultimately the decision to increase GST has been made.
The purpose of this work is to analyze the opinions expressed in relation to the tax increase, expressed by one of the most outstanding Australian economists - Ross Gittins and Michael Porter. This research aims at summarizing the key elements of their reviews, to outline the differences and identify the deficiencies thereof, and argues that although the both scholars have deeply analyzed the outcomes of the proposed tax increase, the failed to take into consideration its long term macro-economic impacts, as well as they have not considered potential alternatives.
GST Increase Opinions of Porter and Gittins
The enactment of this tax initiative will have versatile economic, political and social ramifications for the Australian community. One of the most vocal analysts of the reforms were Ross Gittins and Michael Porter. Both of them are highly recognized economic specialists, with years of practical experience and analysis. However, in their analytical reviews of the problem, the authors have illuminated drastically different sides of the problem. While Gittins considered that the hugest impact will be inflicted on the social classes of the country, Porter highlighted that the most affected category will be the business. Furthermore, Gittins wrote that that raising GST was not the best solution for tackling the growing healthcare expenses, while Porter discoursed that although this approach was flawed, it was necessary.
The main rationale in the analysis completed by Michael Porter is that in order to deliver the most sound evaluation of the problem, the analysis should remain as skeptical as possible. In his analysis, Porter argues that the key feature of the reform is not the tax increase itself, but the package of compensatory reforms, which are not likely to be as efficient (Potter, 2015).
Firstly, professor Porter explains that the ‘hardest impact of the GST hits those, whose income is low’ (Potter, 2015). Thus, it is natural that the government developed a special compensation plan, which, unfortunately, is not flawless. In particular, the compensation system has proportional underpinnings. Thus, according to Porter (2015):
Most people know the GST hits low-income earners harder. So any increase in the GST will need compensation. And unfortunately, compensation has its own flaws. It will most likely be highly targeted compensation - as you work more, your compensation will decrease. And this, unsurprisingly, creates disincentives for work.
Secondly, implementation of these compensation schemes requires extra financing, which automatically signify that less money is available for mitigating the outcomes of considerably more deficient taxes, such as company tax. Furthermore, the practice shows that providing compensation does not result in a drop of complaints. For instance, in 2000 almost 30% of the Commonwealth population received substantial reductions, however, the amount of complaints did not reduce. Porter commented in this regard ‘we should be reminded of the experience with the introduction of the GST in 2000: most Australians were substantially overcompensated, and yet the complaints were endemic’ (Porter, 2015).
Finally, the author speculates that the government may resist the call for increasing subsidies for privately-owned health and educational institutions. However, of these benefits are not provided, the playing field will tilted against them, because their competition with the public segment is already steep.
Therefore, Michael Porter summarizes that the enactment of this changes will significantly undermine purchasing capacity of many Australians, inflicting a serious impact on the local business climate. Initially designed to increase the budget influxes, these taxation amendments may consequentially become a real malady for the national business community.
In contrast to his counterpart, Ross Gittins does not call upon the reversal of this tax change. The predecessor of Turnbull, the Abbott enjoyed to champion a GST increase (Clinton et al, 2015). However, these policies resulted in the problematic budget, which eventually resulted in a number of impracticable promises, lost popularity among the voters and sapped trustworthiness (Taylor, 2015). Thus, it was quite expectable that the government of Abbott war replaced by more reform-intensive Turnbull (Gittins, 2015).
In the meantime, Gittins highlights that replacing one government leader for another does not remove the need for reforms from the political agenda. Unless a global economic overhaul of the entire system is launched by his government, he has no other options but to increase the GST on 15%. Gittins stresses (2015), and his opinion is supported by many notable academics of the Commonwealth, that it is the only, but financially painful way to curb growing budget deficit.
However, promoting these policies he has only one leverage to proceed successfully. A former barrister, the only reliable solution he has is his unprecedented eloquence. As Gittins remarked, if ‘Turnbull can’t sell this reform to the community, then, in reality, no one can comply with this task’ (Gittins, 2015).
Moreover, increasing the GST tax will undoubtedly face virulent resistance from the community. The only way to mitigate this impact is to align with the business segment by means of providing reductions on the corporate and other taxes. However, also this approach may be a salvation for the economy, it is likely to turn into a political disaster for Turnbull and his future political aspirations.
Evidently, the both academicians have in-depth interest in the problem. While Potter is more focused on analyzing potential impacts on the citizens and private segment of Australia, his opponent raised concerns about potential repercussions on the political career of Turnbull and his associates. However, the both analysts failed to consider potential alternatives of offsetting the budget deficit. The research conducted by the Australian Council of Social Services demonstrates that a 15% tax will make the richest families pay only 3.6% additionally, while the earners of lowest income in Australia will have to pay 7% or more (CPA, 2015).
The Council invoked for exploring other methods of coping with the deficit, though it has not completely ruled out its endorsement for GST increase. Although the analysts have not expressly argued for this, many commentators implied that a controversial, but very effective approach is further increase of the corporate tax (ADDA, 2015; Potter (b), 2015).
Firstly, by raising corporate tax not only increasing the budget is possible, but also getting extra affordable financial resources will be an attainable reality (Deloitte, 2015; Potter (b), 2015). Despite the fact that this approach may lead to opposition from the business segment, the social impact will be seriously alleviated. The commentators fervently advocate the notion that diminishment of the available income of families is a considerably more negative outcome, than reduction of the corporate profits.
Secondly, nowadays the economy of Australia functions rather seamlessly. The only cause of the necessity to raise the GST tax is deficit in the public healthcare industry (Clinton et al, 2015). Therefore, a sound solution for the government is offer the unprofitable healthcare institutions for privatization, or to increase healthcare insurance payments. Under any scenario, when the state finds the way to make them profitable again, the need to raise GST tax will be no longer acute.
Finally, the authors have not analyzed the connection between GST increase and investment attractiveness of Australia. Today, the Commonwealth is one of the most attractive countries for foreign investors because of (a) political stability and (b) favorable taxation environment (KPMG, 2011; Clinton et al, 2015)). However, if GST increase, foreign investors may start seeking other alternatives in the Pacific region, thus curtailing investment influxes to the country (Daley & Wood, 2015).
In particular, Professor Potter has closely focused on analyzing important social implications of the tax reform, arguing that increasing GST will lead to discouragement of the potential employees. The higher their income is, the higher the payments will be. Moreover, he emphasized that the most economically vulnerable layers of the society will bear the biggest portion of the tax. Gittins, in his turn, advocated that this law will hit investment attractiveness of Australia, seriously damaging its friendly business climate. The competitors in the Pacific region with similar economies may seize this opportunity, and allure foreign investment, initially designed for the Australians. However, both of them did not analyze alternative methods of filling the budget gap, such as increasing corporate tax, excise duties or other sources of government revenue.
This issue is of vital importance for the Commonwealth of Australia. On the one hand it is important to safeguard effectiveness of the local healthcare system. On the other hand, it is important to protect the community and preserve auspicious business environment. Thus, the government should explore other options, and choose the most balanced approach.
ADDA. (2015). Should The GST Be Increased?, available at: http://aada.asn.au/should-the-gst-be-increased/
Australian Government. (2015). Re:think. Tax discussion paper, available at: http://bettertax.gov.au/files/2015/03/TWP_combined-online.pdf
Clinton, A. Bentley, D. & Simon, J (2015) "Politics and tax reform: A comparative analysis of the implementation of a broad-based consumption tax in New Zealand, Australia and the United Kingdom," Revenue Law Journal: Vol. 24: Iss. 1, Article 3., available at: http://epublications.bond.edu.au/rlj/vol24/iss1/3
CPA Australia. (2015). Tax Reform In Australia - The Facts, available at: http://www.cpaaustralia.com.au/documents/tax-reform-in-australia.pdf
Daley, J, Wood, D. (2015). A GST reform package, available at: http://grattan.edu.au/wp-content/uploads/2015/12/834-GST-Reform-Package.pdf
Deloitte. (2015). Shedding light on the debate Mythbusting tax reform, available at http://landing.deloitte.com.au/rs/761-IBL-328/images/Tax_Reform_Paper_Pdf.PDF
Gittins, R. (2015). It's a sure bet that Malcolm Turnbull will try to raise the GSTavailable at: http://www.theage.com.au/comment/heres-a-prediction-malcolm-turnbull-will-try-to-raise-gst-to-15-per-cent-20151102-gkpa7z#ixzz3yddE9Rli
KPMG. (2011). Economic Analysis of the Impacts of Using GST to Reform Taxes, available at http://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/taxation/kpmg-econtech-final.pdf
Potter, M. (2015). The flaws of an increased GST might outweigh the benefits, available at: http://www.abc.net.au/news/2015-11-02/potter-the-flaws-of-an-increased-gst-might-outweigh-the-benefits/6905012\
Potter, M. (b) (2015). The stealth tax slugging Australians while we debate GST, available at: http://www.businessspectator.com.au/article/2015/12/14/economy/stealth-tax-slugging-australians-while-we-debate-gst
Taylor, L. (2015). Raising GST to 15% 'will cost poorest families 7% of disposable income, available at: http://www.theguardian.com/australia-news/2015/nov/04/acoss-raising-gst-to-15-percent-cost-poorest-families