Tax Reform: A Progressive Consumption Tax to replace the GST?

5 September 2016

There was a good deal of talk before the 2016 election of proposals to reform the GST (Goods and Services Tax) as a budget repair measure. One idea was to increase it, another was to broaden the base so that some items (food, education) currently exempted would not be exempted.

Prime Minister Turnbull scotched the idea  – presumably because it was going to be politically unpopular. Reasoning? A GST impacts more significantly on the many voters with lower incomes who spend a higher proportion of their income on goods and services. Economists refer to this as a “regressive” tax – in contrast to a “progressive” tax, where the tax rate is higher for high income earners.

A sensible administratively less expensive and socially fairer alternative to the GST is a consumption tax. It is mathematically equivalent to a GST, but the collection source is different, the timing is different and it  is possible to make it progressive where it would it would be too expensive and technically difficult to impose a progressive sales tax that is collected item by item at the cashier’s till.

Because consumption expenditure over a period is equal to the sum of sales over the same period, a consumption tax is mathematically equivalent to a GST. The main difference is that a consumption tax is collected periodically like an income tax whereas a GST is collected at checkout counters. Like the GST, a consumption tax encourages savings and discourages consumption. And like the income tax, but unlike the GST, a consumption tax can be made progressive instead of regressive. This would mean that a tax entity (family or person) spending $400,000 would be liable to a higher tax rate (e.g. 20% with a low-taxing government or 30% with a higher-taxing government) than an entity spending $90,000. (who might only pay something like 8% or 15%). Spendthrifts might complain that their taxes are higher than misers’ taxes, but perhaps it’s time for savers to tell spenders to get jacked.

There would undoubtedly be details to iron out (defining and specifying entity, income, savings etc) but in principle, all that would be needed to estimate liability is to deduct annual savings from  income earned. Tax authorities already have access to both these amounts. Changes in the value of the savings vehicles would be treated as income when they are sold – another amount that is knowable from already collected records. Thus, if annual income is $130,000 and the cash value added each year to savings vehicles such as superannuation accounts, share and property portfolios or sent overseas was $30,000 then the tax liability would be based on consumption of $100,000 e.g. $20,000 if the tax rate on $100,000 was 20%.

Dowlphin suspects that a consumption tax would be less administratively burdensome than the current GST and that it would also be fairer.

In Dowlphin’s “ideal” world, the progressive consumption tax would replace both income taxes and the corporate taxes and it wold be complemented by a global progressive wealth as well as “social” taxes on socially unhealthy and environmentally damaging goods and services e.g. sugars and oils in food, fossil fuels, congestion traffic. (More on this in future blogs).

Dowlphin enjoys life without expecting this will happen in his own lifetime but with sufficient faith in human rationality to expect that such a tax regime will one day prevail – hopefully during the lifetimes of his immediate offspring.

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