GST: the Winners and Losers
By Austin Donnelly
Wrightbooks, 1998
129pp., $??
Review by Sue Boland
GST: the Winners and Losers is Austin Donnelly's second book about a goods and services tax. The first, The GST and Fightback Package — a Nightmare Australia Must Avoid, was published in 1992, before the 1993 federal election.
Donnelly describes the campaign for a GST as a "process of repeating inaccurate or untrue statements for long enough until they become accepted as true".
He accurately describes the GST as "a massive transfer of [the] tax burden to low-income earners". He attributes the lack of critical public discussion about the GST to "the fact that the major beneficiaries of the introduction of the GST would be large business, the accounting and legal professions, and high-income earners, who tend to be more successful in getting their viewpoint across".
GST: the Winners and Losers is an attempt to balance the public discussion about the GST with arguments about its disadvantages. Donnelly criticises the use of the term "tax reform" to refer to a GST. He says that "the real meaning of reform is to make improvements and/or to remove weaknesses or abuses".
"Whether or not any changes or proposed changes to the tax system amount to reform depends on whether they better achieve the goals of a fair and efficient system ... To introduce a GST ... is not taxation reform", he concludes.
By a fair taxation system, Donnelly means a system which is based on the principle of capacity to pay — those on higher incomes pay a higher rate of tax.
"Any consumption tax, including the present wholesale sales tax", he writes, "ignores this vital principle of capacity to pay". Because people on low incomes pay the GST on 100% of their income, they would effectively be paying a higher rate of GST than someone on a higher income.
On the basis of overseas experience, Donnelly says that a GST: does not lead to an increase in savings; does not eliminate the cash economy; does not force tax cheats to pay tax; is likely to be increased once it is introduced; is easier to increase than income tax because it is a hidden tax included in the price of goods and services; and has never been rescinded anywhere in the world.
Donnelly points out that nearly all countries with a GST, introduced it "without the prior approval of the electors". Where electors were given the choice, it was rejected or was only just accepted. It was rejected in Australia in 1993. It was approved in Switzerland only after being rejected in three referenda.
Donnelly recognises inequities in the current tax system, but he disputes the proposition that a GST is the solution. He believes that the wholesale sales tax (WST) should be retained, but with the current anomalies eliminated and with inclusion of services used by people on high incomes. He regards the WST as fairer than a GST because it does not tax the basic necessities such as food.
Donnelly acknowledges the problem of high marginal tax rates cutting in at a lower level of income than 20 years ago. However, he advocates adjusting the income tax brackets rather than introducing a GST.
He says that income taxes could be cut without a GST by removing a range of tax avoidance measures used by companies and people on high incomes.
Donnelly's book examines who will be disadvantaged by a GST — people on low incomes, with poor health, old people, frail people, people living in areas with climatic extremes of heat or cold, people who live in rural areas, students, Aborigines, migrants and people with children. Some people are especially disadvantaged because they fit into a number of these categories.
He concludes that "there is no practicable way in which to devise compensation measures which would fairly compensate all of the people who need compensation. "The fact that even the supporters of a GST recognise the need for compensation measures is an admission that the GST is intrinsically unfair ... the very large numbers of permutations and combinations of ways in which the different people throughout Australia would be affected in different ways by the GST, would mean that there would be a large number of anomalies in any compensation scheme."
The inflationary effect is understated by the GST's adherents, says Donnelly, because they assume that business would pass on the benefits of the elimination of taxes such as the WST to the consumer.
Some adherents of the GST argue that it could replace payroll tax, which they claim is a "tax on jobs". Donnelly rejects this argument because a large number of small businesses don't pay any payroll tax. In most states, employers with less than 20-30 employees don't pay it. Donnelly states that savings from the abolition of payroll tax wouldn't necessarily be used to employ more workers. Businesses would use it to boost profits or invest it in new technology.
Neither will a GST resolve the question of financial relations between the commonwealth and the states. Principles of a fair sharing of revenues could be applied if the present WST was improved and retained, says Donnelly.
Donnelly proposes alternative sources of tax revenue. Some of his proposals include:
- abolishing income splitting through discretionary trusts;
- eliminating negative gearing;
- introducing minimum taxable incomes for companies which show taxable income below a certain percentage;
- introduction of inheritance taxes and gift duties;
- eliminating the inflation allowance in calculating capital gains tax (a method of reducing the capital gains tax);
- company tax to be based on the publicly reported net profit rather than another much lower figure as is the case now;
- elimination of over-generous concessions in superannuation and other areas; and
- replacing the current generous depreciation allowances for business with lower rates which better reflect reality.
For anyone who wants to a clear and easy-to-understand guide to the pitfalls of a GST, Donnelly's book is a good place to start. His starting point is "what is fair", a factor absent from the public debate prior to the launch of the two tax packages.
The main weakness of the book is that it doesn't include much data from the overseas experience. Inclusion of this data would have strengthened the book's arguments.
The feeling you are left with after reading Donnelly's book is that groups which purport to represent people on low incomes but who support a GST, such as the Australian Council of Social Service, should be made to read it.