Across the world governments are decreasing tax on capital income and increasing tax on consumption. In the OECD, the average rate of Value Added taxes rose from 16.7% to 19.2% between 1990 and 2015, while the average OECD company tax rate dropped from 38.7% to 25.0% over the same period. This is due to financial market liberalisation as international competition for investment capital has put downward pressure on capital income tax rates as countries attempt to attract foreign investment.
There is a strong distributional argument for moving away from corporation taxes to consumption taxes. Multinationals currently benefit from shifting profits to low tax jurisdictions, with $60 billion of profits from large corporations going to overseas tax havens in 2012. This means that small and medium sized domestic firms face disproportionate burdens from corporation taxation. Furthermore, according to the Australian Treasury’s research, the long run burden of this tax no longer falls on capital owners who move their investments internationally. It now largely falls on workers in the form of reduced wages as productivity declines from lower investment.
A broader Goods and Services (GST) tax along with reductions to corporation tax could be a good route for Australia to take. A broader GST would simply mean a tax on consumption with fewer exemptions (education, health, fresh food). Such a tax would have significant economic merit. Firstly, a broad based GST is one of the few taxes that can efficiently tax the rich who are often able to use tax loopholes on their capital income but find it more difficult to avoid taxation on their expenditure. Furthermore, some existing exemptions have been benefitting high income earners disproportionately, with both GST exempt childcare and education spending being proportionally higher in high income households. These exemptions have also led to distortions in the Australian economy as 54.3% goods and services were eligible for taxation in 2003/04 compared to 48.7% in 2013/14 as consumers have altered their consumption to untaxed goods and services.
To the detriment of its economy, Australia has not followed the trend of moving away from high rates of corporation tax, with corporation tax at 30% and a VAT rate of 10%. Evidence suggests that high rates of corporation tax penalise private enterprise. Analysis of marginal excess burdens of taxes finds a one percent increase in the corporate tax rate leads to an additional 40 cents being lost in the economy for every dollar raised, whereas for a GST rise this is only 8 cents.
Critics of the GST are correct to assert that it is regressive. Low income households generally spend a greater proportion of their income on consumption compared to wealthier ones. However, a recent Chartered Private Accountants study measured four scenarios of a rising/broadening GST to fund cuts on inefficient taxes (insurance taxes, stamp duty and property conveyancing duty), with leftover revenue being used to compensate households through welfare payments and personal income tax cuts. Each scenario provided a long term net gain to the economy as well as showing that the resulting distribution could benefit all Household income quintiles.
There is therefore a strong case for a rise in GST in Australia with corresponding tax cuts elsewhere. It could not only reduce the overall tax burden and improve international competitiveness, but also benefit all households across the income spectrum.