By Allen Myers
When John Howard finally announced on August 13 that he would be campaigning for a goods and services tax at the next election, it was anything but a surprise. The Coalition government and big business have been campaigning for a GST almost non-stop since the March 1996 election.
Howard decided that the High Court's abolition of state taxes on fuel, tobacco and alcohol could be made to look like a situation requiring a GST. Indeed, the big business media were already trumpeting this line.
In fact, however, the court ruling and the aftermath only show that indirect taxes are complicated and inefficient, as well as inequitable.
Across Australia, they must be having an interesting time in university economics departments. The High Court abolishes taxes on certain commodities: what happens to the prices of those commodities? Why, they go up, of course — this is Australia 1997, not the make-believe world of economic theory.
Before the August 5 High Court decision, federal treasurer Peter Costello had promised to collect the taxes for the states if the court ruled them illegal.
However, the different states taxed these products at different rates, and the constitution prohibits the federal government from taxing one state differently than another. Costello therefore proposed to tax at the highest rate in each case; the states would then refund any excess they received to the wholesalers concerned.
Supposedly, this would leave the states with the same revenue as previously, and prices of tobacco, alcohol and petrol unchanged. But things proved considerably more complicated in reality, partly because the state taxes were excise taxes in reality but "licence fees" in form.
Whoever wins, we lose
In NSW, for example, alcohol wholesalers have paid a licence fee which would have expired next January 15. Since the new federal tax is to take effect immediately, the NSW wholesalers claimed that a proportion of their state fee should be refunded.
Not so, replied the NSW government. The size of the alcohol licence fee for 1997 was based on wholesalers' turnover in 1996, so the wholesalers had already collected the tax from retailers, who had collected it from consumers.
Expensive lawyers could well end up arguing whether the NSW alcohol licence fee was a tax in advance or after the fact. Either way, we lose. If the wholesalers don't get their claimed refund, the price of alcoholic drinks will go up by around 15%. If they do, it will leave a hole in state government revenue that will be filled by additional taxes or by cutbacks in services.
The lesson to be drawn here is not a new one, but it bears repeating: governments and business, between them, are going to take from us every cent they think they can get away with. And in doing so, they usually work together.
The fiddles to raise prices and/or taxes on alcohol, tobacco and fuel are relatively minor compared to the big fraud that is being prepared. Even before Howard's announcement, the mass media and most politicians were repeating the refrain that the High Court ruling makes a federal GST a necessity.
Media campaign
The GST advocates seldom, if ever, try to draw a logical connection from the abolition of the state excises to a broad federal consumption tax or GST. This is because there is no logical connection: why should the abolition of three bad taxes create a need for a worse one?
The real connection is historical and political.
In 1985, the federal Labor government tried to bring in a GST but was forced to retreat by widespread opposition from unions and the public generally. In 1993, the Liberals made such a tax the centrepiece of their federal campaign, and as a result lost what was considered an "unlosable" election.
Recognising the unpopularity of a GST, John Howard repeatedly pledged during the 1996 campaign not to introduce one in the current parliament.
The problem for business and the Coalition since March 1996 has been how to get around that promise. Some, like Victorian Premier Jeff Kennett, publicly advocate openly breaking the pledge and wearing the consequences — but Howard is well aware that the consequences would fall mainly on him, not on Kennett.
Twice already this year, we have experienced media campaigns designed to convince us that a GST is the answer to most economic problems, universally recommended by experts and almost universally desired by the public.
But those campaigns were built almost entirely of thin air. The overturning of the state excises is the first real change in objective circumstances that supporters of a GST can point to. It may be a long time before they get another, so they are making the most of this one, regardless of logic or sense. There is a sense of urgency because an early election is always possible.
Shifting taxes by stealth
The total revenue which the states obtained from the now abolished taxes was around $5 billion a year. If the money is not replaced from some source, the states will have to reduce their spending by a corresponding amount.
Costello's plan to increase federal excises and give the proceeds to the states would certainly be a lesser evil than a GST. Nevertheless, as indicated above, it would open the way to further rip-offs. Even in their original form, the state excises were reactionary in the way that most indirect taxes are reactionary: they are proportionally higher on those least able to pay.
What we should be doing is replacing those reactionary excises with progressive forms of taxation — that is, taxes which tend towards equalising the distribution of wealth rather than increasing the differences.
One such tax which is available to the states even under the limitations imposed by the constitution is an inheritance tax. "Death duties", as they were known, used to raise a significant portion of state government revenues.
State governments of both major parties allowed death duties to lose their progressive character by not adjusting them for inflation, so that what was originally a tax primarily on the rich became a tax on everyone. This made it politically possible for inheritance taxes to be abolished from the 1970s onward.
The same sort of dishonesty with "bracket creep" has been used by federal governments to convince us that income tax rates are too high (and therefore we "need" a GST). But income taxes are too high on ordinary working people only because they are too low on high incomes. In fact, people on a taxable income of $40,000-$50,000 pay a higher rate than people with a taxable income over $1 million (see calculation).
Inflation was used to change the relative tax burden in several ways. First, rates of tax were not raised to keep up with inflation. For example, in 1994, average weekly earnings were seven times their 1972 level, but the tax-free threshold had increased only 5.2 times, from $1040 to $5400, over the same period. Thus, a larger part of working-class incomes became subject to income tax.
At the top end of the scale, the top marginal rate in 1994 kicked in at a taxable income of $50,000. In 1972-73 it was $40,000 (in 1971-72, $20,000).
At first glance, it might seem that this meant that the very wealthy were also being taxed more heavily. This is not the case, for two reasons.
First, the very wealthy don't pay the nominal tax rate. Second, the marginal rate on the highest bracket was reduced from 66.7% to 47%.
Labor's role
From the end of World War II, up to the 1980s, there was a steady increase in income tax paid by working people. In 1950, people on the average income paid an average tax rate of 8.2%. In 1960, it was 11.8%, in 1970, 17.8% and in 1980, 22.5%.
After Labor came to federal government in 1983, it reduced income tax, but only for the rich. Today the person on average income still pays an average of 22.5% in tax, but the top marginal rate was reduced from 60% to 47%.
The rich further benefited from reductions in company tax and from dividend imputation, which can make dividends to shareholders tax free.
The changes introduced by Labor, by saving money for the very rich, increased the taxes of workers on above average wages. In the early period of the ALP government, the marginal tax rate of people on the average wage rose as high as 46%; it is still a hefty 34%.
Labor's changes also reduced the overall revenue of the government. A GST is intended to recoup some of that lost revenue — from working people — and to permit further income tax savings for the wealthy.
Labor's role in reducing the taxes of the rich explains why it can't be relied upon really to fight against a GST, even though it senses an electoral advantage from appearing to be opposed to one. (Gareth Evans now huffs and puffs about intransigent opposition to a GST, expecting us to forget that only a few months ago he was publicly flirting with the idea of supporting one.)
The real alternative to regressive indirect taxation is progressive direct taxation — that is, taxing the rich. After 13 years in government doing the opposite, Labor is not going to reverse course in more than words, if that.
For the rest of us, it's important not to be confused by the propaganda. There is no "need" for a GST — except on the part of business and the rich.
Vanishing income tax
The higher your income, the higher the tax rate you pay, right? Wrong. The rate of tax actually paid rises in step with income from the bottom of the scale until about 2½ times average income; then it flattens out and reverses direction as income increases.
According to figures from the Australian Taxation Office for 1993-94 (the last year for which the ATO has published such statistics — probably because they reveal too much), people with a taxable income of $90,000-$100,000 paid an average of 32.6%.
In the next bracket, $100,000-$500,000, tax paid increased only slightly, to 34%. The rate for those on $500,000 to $1 million dropped to 29.9%. And people with taxable income over $1 million paid only 25.1%.
These multimillionaires thus paid a lower rate of income tax than people on taxable incomes of $40,000-$50,000, who paid 26.7%.
If all those on taxable incomes above $100,000 had actually paid the nominal marginal rate of 47%, it would have increased government revenue by nearly $1.8 billion. If they had actually been taxed at a marginal rate of 60%, the nominal rate when the ALP won government in 1983, the extra revenue would have been more than enough to wipe out income taxes for everyone earning less than $9000.