Compensation and exemptions: can the GST be fixed?

Issue 

By Sue Boland

The fact that the current goods and services tax (GST) debate is posed as a choice between increasing compensation or exempting food demonstrates that all parties to the debate already know that the GST is intrinsically unfair.

For the government, the opposition parties, independent senators and big business, the debate about compensation or food exemption is simply a matter of finding the best way to give the GST the appearance of being fair. However, among naive welfare lobby groups, intervening in the debate seems to be seen as a way to actually make the GST fairer. It won't.

The assumption underlying the GST debate is that "we" need a GST, even if it is an unjust tax. Because many groups have accepted this assumption, their attention has been focused on modifying the negative impact of the tax.

Some welfare groups were duped into accepting the "need" for a GST because they had already accepted the government's publicly declared rationale for it: that welfare services will have to be drastically reduced because of a supposed shortfall in government revenue unless a GST is introduced. This rationale convinced the gullible.

The government's and big business's real motives for the GST would be exposed if the government's whole tax agenda was debated at the same time. To prevent this, the government has ensured that the two central components of its tax policy, the GST and cuts to business taxes, will be debated and voted on separately. While the government is pushing for the Senate to vote on the GST well before June 30, the Review of Business Taxation, with its proposal for company tax to be cut to 30%, won't be tabled until June 30.

Blind Freddy could see that the central purpose of the GST is to pay for cuts to business taxes by increasing the proportion of government revenue collected from workers, pensioners, the unemployed and students. This is made clear by the fact that businesses will have their GST payments refunded, so that companies avoiding tax now will still avoid tax under the GST regime.

One welfare group has criticised those others that support the GST. The March 12 Sydney Morning Herald reported that Dr Timothy Battin from the Catholic Social Justice Council described the Australian Council of Social Service (ACOSS) as showing "breathtaking naivety" in joining with business to promote tax reform. He said that ACOSS was "pairing up" with business groups in the belief that they were also concerned about the poor and the neediest.

Inequity

Rather than eradicating inequities in the current tax system, the GST will add inequity.

A GST will do nothing to resolve the problem of workers being pushed into higher income tax brackets when they win pay rises. Recently released tax statistics show that in 1996-97, workers' income tax bills increased by 8% as a result of "bracket creep". Meanwhile, most corporations pay less than the official rate of company tax of 36% (only 18.8% in 1995-96).

There is a simple solution to the problem of bracket creep — index tax brackets when wages increase. However, the current and previous governments have refused to take it up.

In the debate about whether to a exempt food or improve compensation, the Australian Democrats and some welfare groups argue that food should be exempt from the GST because governments can't be trusted to maintain compensation. They point to New Zealand, where compensation for a GST was abolished after less than three years.

Senator Brian Harradine argues that exempting food isn't enough to make the GST fair because it is unfair for poor people to pay tax on any of the necessities of life. Both Harradine and the Democrats make some valid criticisms of compensation and food exemption as inadequate. However, neither of their positions can make the GST fair.

Both ignore the fact that, regardless of how generous compensation is and/or how wide the range of exemptions, it will be easy for governments to remove compensation, reinsert formerly exempt items and increase the 10% rate.

The government claimed before the last election that a consensus between all state and federal governments would be required in order to change the GST rate. This is not true. It is very simple to amend the tax laws and remove the need for all states to agree to a new tax rate.

The Senate Inquiry into the GST turned up a lot of evidence to indicate that compensation and exemptions won't make the GST fair.

When you consider Melbourne Institute for Applied Economic and Social Research figures which show that the poorest 20% of households spend 24% of their income on food, and 38% on transport, fuel, power and clothing (this is in addition to rent and health costs), it is clear that these households can't afford a GST on anything. The figures reflect the fact that many poor households spend more than 100% of their income in order to acquire the essentials of life; that is, they sink into deeper and deeper debt.

Even if the Democrats had maintained their opposition to a GST on any food, people on low incomes will face a huge increase in their cost of living when the GST is charged on their rent, utility bills, clothes, telephone bills, public transport, school expenses, health expenses and many other goods and services which don't currently attract a GST.

Compensation

How can anyone have confidence in any compensation package put forward by the government when it has lied through its teeth about the "positive" features of its tax package?

The Senate inquiry has already revealed that: price increases will be higher than acknowledged by the government, compensation to pensioners will evaporate within a few years, income tax cuts for workers will evaporate after a few years, families with a 17- to 21-year-old dependent will not be allowed compensation, many local government services such as swimming pools, seniors' centres, home help and bus services will attract a GST, the government's compensation package only grants an extra 30 cents for each child, and a million or more people won't receive compensation because they don't receive any benefits from the government and earn too little income to pay tax.

Even if the government did give a big boost to pensions and benefits, it is impossible to adequately compensate all people on low incomes for the negative effect of the GST. For example, people living in remote areas pay exorbitant prices for food and other goods due to freight costs and monopoly supply. This is an especially acute problem for Aborigines in remote areas.

The Australian Consumers' Association told the Senate inquiry that bread, cereals, fruit and vegetables in Aboriginal community stores in the Northern Territory were on average 26-35% more expensive than in supermarkets in the nearest regional centre. In north Queensland, a basket of similar food was found to cost 175% more than in Brisbane.

Food is not the only huge expense in remote areas. Transport is a big cost when people have to travel long distances to work, to access medical treatment and government and other services, and to buy groceries. The government's diesel tax rebate will help businesses, not individual workers or people on government benefits.

Similarly, there are many people on low incomes who are frail, elderly or ill and have extra expenses as a result. They may need to catch taxis because they can't walk far. They may have special dietary requirements. They may have to shop at the more expensive local shop because they can't travel far. And they may have to pay others for house maintenance jobs like lawn mowing.

It is unrealistic to expect any compensation package to adequately compensate people on low incomes who live in remote areas or have poor health. The already impoverished will be further impoverished.

Having said during the last federal election campaign that there would be "no losers" from the GST, the government has been forced to admit that there is a large number of people it had no intention of compensating — those who don't receive government benefits and don't pay income tax.

The size of this group has increased under the Coalition government's welfare policies. Retrenched workers who receive redundancy payouts are now denied unemployment benefits until they have spent their payout. This also applies to people on workers' compensation or other forms of compensation, and to people who retire "early".

Even if the government conceded to a one-off grant to these people, it would not make up for the fact that they will pay a GST of every good and service they purchase for the rest of their lives. Yet, in all the public discussion about the GST, none of the advocates of "improved" compensation have argued for a reversal of the Howard government's decision to deny many people access to unemployment benefits, which cements in the inequity of the GST.

It's time to stop believing in fairytales. The GST cannot be made fair by exempting some items and improving compensation. The only way to make a GST fair is to not have it at all.