8 April 2015
Economy hurt by tax rate more than GST
Treasury has set out the case for increasing reliance on GST and greater use of land tax to pay for cuts to company tax and property stamp duties.
Raising an extra dollar of revenue by lifting company tax causes a 50 cent reduction in overall economic welfare, or more than twice as much damage as a similar increase from the GST or personal income tax would cause, according to a Treasury paper released yesterday.
“The main taxes used in Australia to raise government revenue lead to losses in economic efficiency by distorting price signals and thereby changing the behaviours of individuals, firms and investors.”
The paper, which would have informed the government’s tax consultation paper, found a broad based low-rate tax on all land (which does not exist in Australia) would be the most efficient sort of tax, and would improve national welfare because foreign land owners could not avoid it.
“The legal and economic incidence of a tax does not always coincide: agents that are legally responsible for paying a tax can directly or indirectly pass the tax burden on to other agents,” it said.
It pointed out the impact of lifting company tax was felt most by domestic workers through lower wages and employment.
The study, which examined five major taxes — labour and corporate income, land, stamp duties, and the GST — also suggested that broadening the base of the GST would cause less economic damage than increasing the rate.
Lifting the GST by a dollar caused 19c of damage on the existing base (which covers only 47 per cent of Australian consumption because of exempt fresh food, health and education). A similar increase on a broader base would inflict only 17c of damage.
Stamp duties on property, however, on which state governments rely heavily, were overwhelmingly the worst tax, generating losses to the economy of 72c for every extra dollar of revenue raised. Lifting labour income taxes cost 21c.