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Why it’s time to hike the GST and levy an inheritance tax

By Ross GuestGriffith University

As a country we are not living within our means.

This means we face higher taxes or weaker government services unless we do something different.calculator

The government’s recent budget outlook (MYEFO) confirmed that the Australian government budget is rotten at the core.

The government is hopelessly living beyond its means, with expenditure greater than revenue and debt ballooning throughout the next decade and probably beyond.

The government’s debt is our debt

A technical point: this would not be true if we were a closed economy without recourse to foreign borrowing – in that case the government would be borrowing from us.

But Australia is very much an open economy with easy access to foreign credit – and we’ve been using it.

This means we face higher taxes and weaker government services (health, education and so on) in the future unless we start living within our means.

Feasible spending cuts will not be enough

We must find more tax revenue in a way that is fair and does minimal damage to incentives to work, save and invest.

The Organisation for Economic Cooperation and Development (OECD) has just released its Economic Survey of Australia which points out what just about everybody except for Australian politicians knows: we must increase the GST.

Australia’s GST rate is one of the lowest in the world. New Zealand has 15%, the UK has up to 20% for example.budget cuts

Here are some ballpark numbers from the recent MYEFO. The GST revenue in 2015 is expected to be A$54 billion.

The budget deficit is A$44 billion. So if we increased GST revenue by half we would wipe out more than half the budget deficit.

Roughly the same amount of revenue could be achieved by increasing the GST rate by just 2% to 12% and removing most of the GST exemptions on health, education and financial services which together cost, in lost revenue, A$11 billion in 2015.

A higher GST is not necessarily unfair, especially if it’s combined with higher taxes on the wealthy (which I’ll get to below).

tax_timeA tax that seems to hit low income people is not so tough when you take a lifetime perspective or consider people living in households.

Low-income people are often young people with good lifetime income prospects, like university students.

Yes they pay more tax now, but they benefit when they are older as the GST takes a lower proportion of a higher income.

Also, low income individuals in Australia, including students, are almost as likely to be in a high-income household as in a low-income household.

Sending the right message

The GST does less damage to incentives to work, save and invest than most other taxes, such as income tax which discourages work and saving, and stamp duties which discourage people from moving to places where there are better job opportunities, and payroll tax which is a direct tax on employment.

The GST can also help to insulate tax revenue from an ageing population, since fewer workers relative to consumers means less labour income relative to consumption.

Consumption will be a more stable tax base than labour income in the coming decades.

An increase in the GST would have to be accompanied by higher taxes on wealth, for the sake of fairness and hence political success.

An inheritance tax?

One option is an inheritance tax which a number of countries have in one form or another including the US, the UK and a number of European countries.

One problem is that a pure inheritance tax may not generate much revenue based on current asset holdings of older Australians.

Total net wealth of Australian households aged over 75 in 2012 was a little over half a billion dollars, according to the Australian Bureau of Statistics.

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This is a very small base from which to collect revenue. However our existing capital gains tax is a kind of defacto inheritance tax, and it could be changed.

Currently, capital gains tax concessions on the family home and other assets cost, in lost revenue, in excess of A$20 billion, according to the latest MYEFO.

So, combining an inheritance tax with a tightening of capital gains tax concessions could wipe out a significant proportion of the current A$40 billion budget deficit.
Inheritance taxes could deliver more revenue in the future when the current baby boomers die, as they have seen their asset values – housing and superannuation – rocket over the past couple of decades.

And many of these baby boomers are probably also receiving large inheritances from their elderly parents.

Such windfall increases in wealth tend to discourage labour force participation – exactly the opposite to what we need given our ageing population.

Importantly, an inheritance tax does relatively little damage to incentives to work and save

This is because we don’t know exactly when we are going to die or what our medical expenses will be in old age.

house money loan

This uncertainty leads many people to “over-save” in the sense that they die with wealth that they thought they might need for further old age expenses.

This part of a deceased person’s bequest is unplanned and therefore taxing it after death cannot distort incentives to work or save during one’s lifetime.

Of course an inheritance tax must be accompanied by a gift tax to prevent offloading of wealth on one’s death bed.

There could be exemptions for the first million dollars of the family home for example, and then the remainder taxed at either a fixed rate or a rising rate according to the value of the estate.

All of this would seem to fit well with the ethos of Labor and the Greens.

So a package of higher GST and higher taxes on wealth might actually get through the Senate.

The Conversation

This article was originally published on The Conversation. Read the original article.



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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


'Why it’s time to hike the GST and levy an inheritance tax' have 7 comments

  1. Avatar for Property Update

    December 29, 2014 @ 8:31 am Surfie girl

    Hold on Ross. We should not be increasing the gst, nor should we be implementing an inheritence tax. Labour tried the inheritence tax years ago and paid badly for it. Who was it Gareth somebody? Then we never heard from him again. Most unaustralian of you Ross. Our parents assets and savings were accumulated using After tax money. So you want to double tax their earnings and accumulations. As you well know their savings lost value daily while the big banks exploited their savings to make billions and still do with our money in the bank. Get you priorities right. Advocate stopping multi national companies from taking profits (our money) tax free out of Australia and get the very large companies to pay more than the, is it 10 cents in the dollar or less, whilst the older Aussies like myself were subjected to high taxes all of our lives. What is 47 cents in the dollar if not a high tax compared to 0 to 10 cents in the dollar for the big boys. Then you can talk about fairness. And whilst you are at it why don’t you advocate governments exert better control over the budget and act in a professional way about it. I do not want another labour lot like we have just endured throwing my hard earned tax dollars away on stupid programs, when they have an obligation to manage that money properly and spend it on things we all need such as health education infrastructure etc
    Get your priorities right and stand up for the Australian people not try to drag us Down with more unfair taxes
    Surfie girl

    Reply

  2. Avatar for Property Update

    December 29, 2014 @ 9:06 am Pavlo

    You rightly say, “The government is hopelessly living beyond its means.”
    Here’s an idea. How about successive governments actually start living within their means? Increasing the GST and adding an inheritance tax will simply give them an increasingly bigger pile of money to squander.
    As Surfie girl says get the multi nationals to start paying more than 10c in the dollar tax.

    Reply

    • Avatar for Property Update

      December 29, 2014 @ 9:18 am Michael Yardney

      Good point. One of the problems is the government makes all sort of election promises and then try to live up to them.
      Of course another problem is our increasing expectation of governments providing services and handouts

      Reply

  3. Avatar for Property Update

    December 29, 2014 @ 10:08 am Smila

    Typical, some goose comes up with the brilliant idea to tax us more because the government can’t live within its means. I get really irate with this sort of talk for the following reasons.:
    1. It will not affect the wealthy as they will structure their wealth to bypass or minimise any proposed new gifting or inheritance tax.
    2. Those who choose to spend all they earn throughout their working life will not be affected as they will have nothing to contribute.
    3. That leaves those who have saved a portion of their earnings for tomorrow instead of spending it today will be screwed.
    What all these academics and gurus don’t understand is that it is our money that we have earned, what we do with it is none of their concern, and if at the end of the day we should be allowed to leave it to whoever or whatever we want.
    The problem here is not that we are spending too much, I live within my means, it is governments off all persuasions spend too much. We do not need to curtail services on health, education, welfare and public services, but we do need to get out of everything else and let private enterprise do it. I can guarantee that this government will leave us with a larger debt than the last one, and the next one will leave a larger debt than this one, and so on it goes. Don’t be fooled Liberal, Labour, Greens when in government they will always spend beyond their means.
    The GST, I remember when it was introduced we were promised that it would NEVER needed to be increased as this new tax on consumption would be the panacea of our governments spending habits. Also increasing the GST would surely reduce consumer spending and increase inflation, just what Australia needs at the moment.
    2 things from all this:
    1. If you are not focussed on becoming wealthy then spend and live for today so the government can’t get their hands on your money when you die.
    2. Try and become as rich as possible so you can structure yourself so the government can’t get it
    Remember we work for the benefit our family not for the government to give it to someone who has squandered it away

    Reply

  4. Avatar for Property Update

    December 29, 2014 @ 10:47 am Jeff Kerse

    I don’t understand why Australians are so against GST
    Can’t people see how well it works in NZ ?
    It started there at 10% ,then became 12.5% and is now 15%
    This happened because it was so effective
    Income tax rates decreased – lower income earners pay very little income tax now
    If you save your money you don’t get taxed as much and your savings compounds much faster
    If you have a larger income and buy luxurious items and spend much more money you get taxed more
    Higher GST really is a good system – if only people would actually take the time to understand how it works

    Reply

    • Avatar for Property Update

      December 29, 2014 @ 1:06 pm Michael Yardney

      Jeff

      There are many benefits to a GST and as you say it is a very fair tax that also catches people who earn their money in the “black economy.”

      Reply


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