OECD report builds case for GST rise but with personal tax cuts

Australia’s GST rate is now half the average of the developed world, according to the Organisation for Economic Co-operation and Development, building the case for the issue to be looked at as part of the federal government’s upcoming tax review.

In an interview with Fairfax Media the OECD’s head of tax Pascal Saint-Amans said while he could not dictate government policy, from a theoretical and statistical perspective there was scope to life the GST rate and broaden the base to bring Australia into line with other countries.

The OECD research shows Australia’s 10 per cent GST rate is well below the OECD average rate of 19.5 per cent.

The financial systems inquiry report handed down by former Commonwealth Bank chairman David Murray on Sunday also suggested that in its tax review the government consider broadening the base to include financial services, currently exempt from GST.

Treasurer Joe Hockey is expected to make a more detailed statement on taxing multinationals this week, and also release an options paper for reforming the tax system this month.

The Consumption Tax Trends report found that GST revenues in Australia accounted for 12.1 per cent of total tax revenue in 2012, the second lowest proportion in the OECD after Japan. At the same time it confirms that Australia has a high reliance on personal tax and company tax.

Mr Amans said this statistical evidence, together with the OECD mantra that indirect taxes (such as GST) are better than direct taxes (income tax and company tax) is a reason why the government may want to review GST. “You may say, ‘well there is room’,” he said. “But again, this is really a mater of choice and we don’t want to be prescribe policy”.

The OECD has also released separate research looking at the impact of consumption taxes in 20 countries. It says rich households receive as much benefit from a reduced consumption tax rate as do poor households, and “at worst, rich households benefit vastly more”.

Tony Abbott and Joe Hockey have said that GST will be part of the government’s upcoming tax white paper, but have vowed that any possible changes would not happen in the Coalition’s first term, and instead presented to voters to decide on at the next election.

Abbott government adviser and pollster Mark Textor recently said that any changes to the GST would have to be supported by a broader package of personal tax cuts and greater spending on crucial services such as education.

Australia is now the sixth lowest (28th out of 34 member countries) in the OECD in terms of its tax to GDP ratio. This measures the ratio of tax collection against national gross domestic product. Some governments have recently increased their tax to GDP ratio to cover budget deficiencies.

In Australia, since tax revenue collected from mining companies has slowed, Australia’s tax burden has shot up. The tax burden measures the total tax paid in a period as a proportion of total income.

The report showed the tax burden in Australia increased by 1 percentage point from 26.3 per cent to 27.3 per cent in 2012. The corresponding figure for the OECD average was an increase of 0.4 percentage points from 33.3 per cent to 33.7 per cent.

But, since the year 2000, the tax burden in Australia has declined from 30.4 per cent to 27.3 per cent. Over the same period, the OECD average fell from 34.3 per cent to 33.7 per cent.

The report also found that Australia had a proportionately higher reliance on payroll tax when compared with the OECD as a whole.

The Australian Chamber of Commerce and Industry director of economics and industry policy, John Osborn, said Australia’s reliance on company taxes was more than double the OECD average and payroll tax was “500 per cent higher in Australia than the OECD average” dragging down the nation’s competitiveness.

“Inefficient taxes unnecessarily reduce incentives for people to work, invest and employ,” Mr Osborn said.

Tax Institute senior tax counsel Robert Jeremenko said Australia’s GST revenue growth was under pressure as consumption of GST-free goods and services increased.

“This is compounded by our low rate of GST with a tax base that is riddled with exemptions,” he said.

Mr Jeremenko said that, together with the fact that there was increasing reliance on personal taxes, had meant the tax burden fell on people on average incomes.

“Tax reform must include changes to the GST so that we can move the tax mix away from relying so much on revenue from income taxes and more towards revenue from taxes on consumption,” he said.

The OECD report also found as volumes of cross-border trade in services and “intangibles” grew, there would be “considerable difficulties in determining where services are deemed to be consumed, to monitor these transactions and to ensure collection of the tax, particularly where businesses sell services in jurisdictions where they do not have a physical presence”.

“From a government’s viewpoint there is a risk of under-taxation and loss of revenue, or distorting trade through double taxation,” the report said, although it held back on suggesting how this could be fixed. Mr Amans said that the OECD would put out a report with suggestions on that in January.