Consumption tax: disguised handout to the rich

Wednesday, October 23, 1991

By Peter Boyle

The problem with Australia, federal opposition leader John Hewson told the Business Council of Australia on October 17, was that most people are paying dearly for the benefit of a few. A privileged but vocal and influential minority made up of the "extreme green lobby" and "the Aboriginal heritage movement" had "shifted government ... to the expense of all Australians". These two groups, and immigration, he argued, had to be curtailed to save the economy and bring down high unemployment.

The suits at the BCA meeting applauded Hewson's mock outrage. But strip away the rhetoric, and what Hewson and the corporate chiefs are really upset about is that, in their opinion, the majority are not paying enough for the benefit of the few — them. Hence the pièce de résistance of Hewson's platform is a consumption tax on all goods and services, to raise enough revenue so that more income tax cuts can be delivered.

While the details of Hewson's proposed consumption tax have yet to be revealed, it has been calculated that a rate of at least 15% would have to be levied to allow for any significant income tax cuts. So under a Hewson government, we can expect to pay at least 15% more every time we buy anything.

Consumption tax (also called a goods and services tax — GST, or a value added tax — VAT) will hit lower income earners and large families hardest because a bigger proportion of their income has to be spent on goods and services. Hewson has promised compensation to these sectors, but one of the few possible exemptions he has mentioned is an exemption for fees to private schools!

Meanwhile, income tax cuts will benefit upper income earners the most.

A recent (and conservative) discussion paper by the Australian Catholic Social Welfare Commission points out: "If total tax revenues are to be unchanged ... then the gains of one group must be at the expense of the others".

The tax burden could be shifted more onto middle and lower income earners by reducing the marginal income tax rates in the upper brackets (as has already been done under Labor), but doing the same thing through a consumption tax helps to hide what is going on.

Why is Hewson staking his future on an unpopular consumption tax? It is almost the only fiscal measure to benefit the ruling class that hasn't already been implemented by the Labor government.

Through wage control, income tax cuts and cuts to social services, the Hawke government has already delivered a 10% increase in the share of profits in national income. This is far more than the 2.6% increase in all the industrialised (OECD) countries in the same period, most of which have some form of consumption tax.

Because of the Labor-ACTU Accord, real wages have been cut more than in other industrialised countries, so Labor has not had to use a ce the income of the wage-earning majority (although Paul Keating did propose such a tax when he was treasurer).

Hewson and other proponents of a consumption tax raise several arguments to distract public attention away from the fact that their central aim is a redistribution of income in favour of the rich. But every one of these arguments is flawed or misleading.

A consumption tax is needed because income tax rates are too high and destroy work incentive, they say. But all measures which reduce real income can adversely affect incentive to work, and you never hear this argument used against wage cuts. And tax cuts for the rich do not necessarily mean that they will work harder! Arguably, if the income tax rates paid by wage earners were reduced while taxes on the rich were increased, most people would have more incentive because they would be taking home more pay.

It is argued that a consumption tax would promote savings and investment, but the empirical evidence is that this is not true. In Italy, for instance, the introduction of a value added tax has not increased savings or investment. There are many other factors determining how much and where investment flows under capitalism, the chief of which is the prospect of making a profit.

If the objective is to encourage savings, other measures would be more effective, such as making the savings accounts and superannuation payments of wage earners tax exempt.

Another argument is that existing indirect taxes are inequitable and inefficient. The argument by itself has some merit but is not an argument for generalised indirect taxation. It would be more equitable and efficient to rely on a more progressive income tax system. However, selected indirect taxes can also be used to discourage socially or ecologically undesirable activities.

It is argued that a consumption tax will recoup more tax from income tax evaders. In particular, it is suggested that operators in the "black" or informal economy would be taxed. But overseas experience does not indicate this. Italy, with its VAT, still has a thriving informal economy.

Further, most of the big tax evaders are the rich and businesses, who benefit from loopholes in the tax laws. Some of the biggest corporations paid taxation of only a few cents in the dollar in the 1980s. They would pay no more under a GST, because they would pass on their tax costs to consumers. A real solution to tax evasion is to close the present loopholes.

It is even argued that a consumption tax would reduce Australia's foreign debt by restraining domestic spending and imports. But much of the foreign debt is the result of big business borrowing money to invest in overseas expansion, according to the Reserve Bank. This can be related to tax incentives to big business to shift cash offshore.

Still Hewson and big business persist in the lie that the debt is a result of the average Australian spending too much. Just as they are exploiting public worry about the foreign debt to force wage earners to work harder for less pay, they now want the same people to pay more tax as well.

Another issue raised in the debate is inflation. The Hawke government warns that a consumption tax will be inflationary, while Hewson and company say that it won't boost inflation because the 15% or so increase in prices will have a once-only effect.

Using the same argument, a once-off wage top-up of, say, 40% wouldn't be inflationary (in aggregate, it would amount to a fraction of 15% on all goods and services). But, of course wage rises, as distinct from handouts to big business and the rich, are always inflationary, aren't they?