With talk of tax reform in Australia, it’s interesting to see what other countries can teach us about tax reform.
Value added tax (VAT), virtually non-existent before 1960, has been the predominant form of consumption tax since the mid-1980s.
Given that more than 160 countries now have a VAT, it is hardly surprising that proponents of GST reform for Australia regularly point to other countries in support of proposed changes.
Most commonly, references are made to New Zealand (for its broad base and now 15% rate) and to member states of the EU (for their much higher rates).
But what can we really learn from other countries’ experiences?
Many older VAT regimes (in Europe, Central and South America, and North Africa) are highly complex, characterised by multiple rate structures, high standard rates, and multiple exemptions for social and cultural goods.
While they might have standard rates as high as 27% (Hungary), many products are not taxed at the standard rate.
Newer regimes, (New Zealand, Singapore, South Africa, Canada, and others) are simpler, and have a single medium/low rate with fewer exemptions.
Australia was a late adopter and already has a comparatively broad-based, single rate GST.
We also avoided the complexities of the older regimes by treating social goods, such as basic food and medical and health care services as GST-free rather than input taxed, but while this limited the impact on registered businesses it increased the revenue loss resulting from such concessions.
Should we go further?
Proponents of base broadening suggest including food, education, and health care in the tax base, but only New Zealand and Singapore do this and both did so from the outset.
No-one is proposing that Australia follow Singapore’s example. Its GST is charged at only 7% and has a registration threshold of SGD 1 million (around A$950,000), more than twelve times higher than Australia’s threshold.
While businesses with lower turnovers can register if they want to, most SMEs can choose to be exempt by not registering.
Moreover, to combat the regressive effect of increasing its rate from 5% to 7%, Singapore introduced a GST compensation scheme, which provides cash payouts and other support to the poor and retirees.
It also absorbs the GST cost on some health care. Canada too operates a GST credit scheme to alleviate the regressivity of its GST.
Closer to home, New Zealand applies a 15% GST to all private consumption expenditure, except financial services, residential rent, and some charitable activities. Food, education, and health care are all taxed.
Tim Hazeldine questions whether New Zealand is really such a good example for Australia. In my view, it is not.
For one thing, New Zealand is not a federation. (Nor, for that matter, is Singapore.)
The Commonwealth has committed itself to having the unanimous agreement of the states before any changes are made, and GST reform is inextricably linked to the broader discussion about Australian federalism and the GST distribution formula.
The complexities of the Constitution also require consideration when it comes to taxing the activities of state governments.
Taxing education is not so straightforward
As for education, 96% of New Zealand children attend state or integrated schools funded by the central government, while only 4% attend private schools, which are themselves subsidised.
Many “fees” paid by the parents of children attending New Zealand’s state-funded schools are not subject to GST because they are considered donations, rather than payments for education services.
Applying GST to education really only affects the upper echelons.
The situation is quite different in Australia: 65% of Australian children attend public schools (run by the states) while 35% attend private schools (with heavy subsidies from the Commonwealth).
Taxing education in Australia would have a much more significant impact, the incidence and effects of which would need careful consideration.
The situation is not dissimilar with health care. Let us also not forget that New Zealand has a high level of income inequality.
Taxing food might be sensible but is it feasible?
Food is another issue altogether, yet is likely to be just as controversial with the electorate.
There are good arguments for taxing food (or at least for taxing more foods than we currently do), despite suggestions that this will make us less healthy.
There’s no obvious reason why a dozen large Pacific oysters ($20.99), half a kilo of organic grass-fed eye fillet of beef ($30), 4 fresh black figs ($9.16), a 225g block of cultured butter ($8.99), and 500g of smoked salmon ($18.99) should be GST-free.
Anyone who can afford to eat these regularly can afford to be healthy.
On this matter, unfortunately, we can learn something from the recent “pasty tax” controversy in the United Kingdom: once a particular foodstuff is exempt, it is very hard to get it back into the tax net.
It takes a resolute government to explain the need for change and to resist the pressure from producers, consumers, and other interest groups to retain the status quo.
Reform is always hard
The most obvious lesson we can learn from other countries is that the best way to achieve a very broad-based GST is to introduce one from the outset.
Raising the rate has proved much less difficult than expanding the base, with the OECD reporting significant rate increases in most countries since the global financial crisis.
We can learn from New Zealand that it is possible to operate a very broad-based GST; what we cannot learn from them is that we should.
The debate about GST reform cannot be divorced from the adult discussion we need to have about what kind of society we want, what we are willing to pay for that society, and who will bear the burden of any changes we make.
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