Latest NSW GST plan would shift tax mix to the benefit of higher income earners

In responding to the NSW Premier Mike Baird’s revised proposal to increase the GST, the Australian Council of Social Service said the plan would leave low and modest income earners worse off, who would pay more of their income in GST, and leave unchecked the tax breaks and loopholes that allow higher income earners to avoid paying their fair share of tax.

ACOSS CEO Dr Cassandra Goldie said:
“We are disappointed that the whole focus of tax reform is on the GST, when there are better and fairer ways to raise revenue.

“If we are serious about using tax reform to improve economic efficiency, why aren’t the Premiers and the Federal Government talking about strengthening land taxes, our most efficient tax base?

“If we are serious about improving equity, why aren’t they talking about closing down tax breaks and loopholes, particularly in superannuation, negative gearing and capital gains tax, and family and company trusts – all of which overwhelming benefit people on the highest incomes and weaken the personal income tax base, our fairest tax base?

“If we are serious about improving investment conditions, why aren’t they talking about removing tax distortions that drive investment into less productive assets like existing real estate? These would be fairer and more logical places to start reform.

“Instead, we have a narrow debate, with the latest proposal being again to raise the GST primarily to fund tax cuts on both personal and corporate incomes. This proposal fails every test, with its major effect being to shift the tax take away from higher incomes earners to people on low and modest incomes.

“Despite the hype, the case for raising the GST to cut income tax is weak because so much of the revenue raised would go to funding income tax cuts and other compensation measures. This would do little to address the long term funding shortage faced by state governments.  Under the NSW government’s latest proposal, a meagre $7 billion of the $32.5 billion raised would go to states to fund schools and hospitals.

“Furthermore, the argument that you can make an unfair tax fair by compensating low income earners is a smokescreen. The Grattan Institute estimates around 60% of the extra money raised would need to go on compensation just to avoid low and middle income earners being worse off, which beggars the question, why would we do it?

“We also know from recent experience that compensation through income support payments is at high risk of erosion over time. Since the GST was first introduced, people on the lowest incomes, people unemployed, single parent families, and people with disabilities have all been in the firing line of major cuts to their income, yet they are all still paying 10% tax on their spending.

“ACOSS commissioned NATSEM modelling in November last year showing that an increase in the rate of the GST to 15% would mean low income people would a higher proportion of their incomes on tax relative to those on higher incomes. It would require people in the lowest 20 per cent of the income brackets to pay 7% more, people in the middle 20 per cent 4.2% more, while those in the highest 20 per cent income bracket just 3% more of their income.

“It also found that raising the GST to 15% to pay for a cut of 5% in all personal income tax rates would be even more disastrous for low income households. Two thirds of households, on incomes up to about $100 000 would be worse off and the top 40% would gain at the expense of the bottom 60%. The lowest 20 per cent would lose $33 a week or 6.6% of income on average, while the top 20 percent would gain an average of $69 a week or 2.1% of income.

“These impacts cannot be justified under the questionable guise of stimulating economic growth and competition. It’s nothing more than a shift in the tax mix that penalises people on low and modest incomes for the benefit of those on the highest incomes and companies, doing little to secure funding for services into the future.

“It would do nothing to address unfair tax concessions and tax breaks which clearly need to be addressed in order to fairly strengthen our tax base, and improve economic efficiency. This latest proposal is a recipe for growing levels of inequality in our country, which ultimately is damaging for our economy as well as for us as a community,” Dr Goldie concluded.

Media Contact: Fernando de Freitas – 0419 626 155

More information:
ACOSS NATSEM Modelling: Using a higher GST to pay for income tax cuts is a ‘recipe for more inequality, with higher income earners the winners – November 5, 2015.