Higher GST, congestion charges: Why you could end up paying more in tax

Tax is a political minefield, but something needs to be done as the population ages

Tax reform has been on the agenda for decades, but since the introduction of the goods and services tax in 2000, governments have had little appetite for change.

The OECD's latest economic survey, however, has again made the case for reform.

It says Australia has become increasingly reliant on personal income taxes, which will make it harder for governments to raise money as the population ages.

Personal income taxes made up 47% of government revenue in 2019-20 and account for almost 12% of GDP, compared with around 8% for the OECD average. The GST accounted for only 13.4% of tax collected, with most OECD countries collecting much more.

This is important because broad-based taxes like the GST provide the government with a more certain stream of revenue. We all need to spend money to eat, keep ourselves clothed, travel and basically fund our lifestyles, whereas a growing proportion of the population will not be working as the nation ages.

Like other OECD countries, Australia has run up huge debts to get us through the pandemic and it will be up to future governments (and taxpayers) to handle that legacy.

Given that Australia has a very generous pension tax system, it will be imperative for future governments to find new ways to increase their revenues.

The OECD also argues that inefficient taxes curb economic output and Australia needs reforms to improve productivity and boost wages and growth.

Increase the GST

The OECD has reignited calls for the GST to be lifted or expanded to include items that are currently exempt. It estimates that raising the rate from 10% to 12.5% would lift government revenues by 1%.

At 10%, our GST rate is lower than in most other countries, with the OECD average just under 20% and the majority of countries surveyed having rates of 20% or higher.

But it says Australia also has more items that are GST exempt, which means the government could increase overall revenue by keeping the rate constant and removing some of these exemptions.

To win support for its introduction, the Howard government carved out a range of goods from the GST, including most basic food, some medical and healthcare products and services, financial services and some education expenses.

Remove the exemptions

In its report last year, Where next for Australia's tax system? How GST reform can help reboot prosperity for Australia, the consulting firm PwC calculated that including the five main exemptions would lift GST revenue by 20.7% at the standard 10% rate. If the rate was increased to 12.5% and these items included, it would lift GST revenue by 40% a year.

Another option that was explored was introducing a tiered system where some items are taxed at a lower rate, as happens in many other countries. If the tax rate was lifted but a 5% rate applied to the main exemptions, it says GST revenues would increase by 25% a year.

Any GST reform would have to include some compensation, especially for lower earners who spend more of their income and would bear a disproportionate share of the extra tax burden.

So, any increase would need to be accompanied by personal tax cuts at these income levels. The OECD also recommended Australia increase unemployment benefits, which are low by international standards.

Crackdown on pensions 

As PwC pointed out, the GST is an attractive option for tax reform because it is already a large source of revenue, and any changes would produce substantial results. But the OECD has recommended other reforms to make us less reliant on income tax.

One recommendation is to tackle the discrepancies in how different types of savings are taxed.

It points out that Australia has close to the highest marginal effective tax rate on bank deposits in the OECD while taxes on private pension savings are well below average. As older households tend to have more of their savings in the more lightly taxed super system, this can create intergenerational equities as well as limiting future government revenue.

While taxing pensions at the same rate as bank accounts would be political disaster with an ageing population, it says the government needs to move to at least reduce some of the concessions favouring higher earners.

It also recommends reducing the capital gains discount, reviewing corporate income taxes, and taxing resource rents rather than royalties.

It says the current company tax system, where smaller companies are taxed at a lower rate than larger companies, needs to be reviewed and state governments should look at replacing stamp duty with an annual charge, as has already happened in the ACT and is proposed for NSW.

Consider the environment

Another recommendation is to look at tax reform to address environmental issues.

This could involve measures such as taxing road transport and moving away from taxing car ownership to taxing car use through things like distance-based road user charges and congestion
charges. It also recommends some form of carbon pricing.

Did you know

Australia last had a major reform in the late 20th century, with changes such as the introduction of taxes on fringe benefits and capital gains, and a new tax system for retirement savings.

Best-case scenario

As any tax reform creates winners and losers, governments are understandably wary of upsetting key voters. A major change, such as increasing the GST, would need to ensure middle and lower income earners in particular do not end up worse off.

Worst-case scenario

Those arguing for change would claim the biggest risk is not doing something to ensure the government has the funding needed for the challenges ahead.

The wild card

Several of the OECD's recommendations have been proposed before and knocked down by political wrangling. Environmental tax reform is particularly toxic and has played a part in the downfall of several political leaders.

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