Wednesday, July 22, 2015
Put at its simplest, the concept of opportunity cost says that if you've got a dollar, you can only spend it once. This truth might be glaringly apparent, but it's surprising how often grown men (and, less commonly, grown women) forget it.
By contrast, the original magic pudding allowed its owners to "cut and come again". No matter how many times they cut themselves a slice, the pudding would magically grow back.
Just the most recent proposal for a higher GST – of 15 per cent – comes from the Premier of NSW, Mike Baird. He wants it to help the state governments raise more taxation to help them pay for the ever-growing cost of their public hospitals and still balance their budgets.
But Baird and some of his fellow premiers aren't the only people with designs on the extra revenue a higher GST would bring. He's been spurred by the knowledge that, so far, Prime Minister Tony Abbott is sticking with the plan announced in last year's budget to move to a less generous way of indexing federal grants to the states for their public hospitals and schools from 2017, which would cause those grants to grow by $80 billion less than they would have, over the following decade.
There are people cynical enough to believe this cut was aimed at softening the premiers up and obliging them to agree to an increase in the GST as the only solution to their future funding problems.
But do you see what this means? It means a big slug of the extra revenue raised by a higher GST would go towards solving the feds' budget problems, not the states'. Suddenly, the pot of gold isn't looking so big.
But that's not all. There are a lot of economists and business people urging that the proceeds from the higher GST first be used to abolish various state taxes regarded as "inefficient" – that is, ones that have the effect of seriously distorting the choices people make.
Top of the list of inefficient state taxes is stamp duty on the transfer of commercial and domestic properties, and the tax on insurance policies. But some business people have their eye on using the GST to replace payroll tax. And a lot of landlords would like to get rid of land tax.
But why stop at eliminating state taxes? Why not use it to reduce a few federal taxes you don't like?
Big business is very anxious to "reform" the tax system by using a higher GST to cut the rate of company tax. And many high income-earners believe it vitally important to cut the top personal tax rate, lest all our top people migrate to countries where taxes are lower (Malaysia, say).
It's clear Treasurer Joe Hockey would very much like to cut company tax and the top tax rate for individuals, if only the boss could summon the courage (and Hockey's powers as a salesman were magically transformed).
But Hockey has another problem he'd no doubt like the GST's help with. He knows that the main thing he's using to allow him to project slowly declining budget deficits in coming years is ever-rising collections of income tax, caused mainly by "bracket creep" – inflation pushing people into higher tax brackets.
The trouble is, after a while, people notice the higher tax rate they're paying on any overtime or pay rise. When they do, they tend to get pretty stirred up and look for a politician to blame.
So Hockey knows that, before long, he'll need to have a tax cut that gets people on tax rates below the top one back into lower brackets. It would be nice if he could make up some of this lost revenue by increasing the GST.
See the magic pudding? There's a host of different groups pushing for higher GST, but they all want to use the proceeds to pay for something different. Between them they have plans to spend each extra GST dollar many times over.
That's true even if, as well as simply increasing the rate to, say, 15 per cent, we also extended it to cover food, education, health and financial services.
And don't forget this: because the GST is universally acknowledged to be a "regressive" tax – it takes a higher proportion of low incomes than of high incomes – it would have to come with a lot of "compensation" for low- to middle-income earners, in the form of increases in pensions and the family allowance and cuts in income tax at the bottom.
All this compensation would have a cost. In other words, the net proceeds from raising the GST would be a lot lower than the gross.
If you get the feeling the debate about increasing the GST has entered the realm of fantasy, you're not wrong. Once the more fanciful ways of using the proceeds had been eliminated, the number of people pushing for it would be greatly reduced.
If you get the feeling this means the GST won't be going up any time soon, you're not wrong, either. I won't be losing any sleep over it.