PwC weighs in on GST debate

• Fresh calls for a Goods and Services Tax (GST) reform are continuing to mount, with consultancy firm PricewaterhouseCoopers (PwC) the latest to chime in
• A recent PwC report claims by raising the GST to 12.5 per cent and broadening it to include services like healthcare, childcare and education could bring Australia an extra $40 billion
• Those opposed to the GST hike are raising concerns about the adverse effects it could have on low-income households
• Moreover, company tax is flying under the radar, despite being proven to be one of the only national taxes that are not economically damaging and brings about a net welfare gain
• The Morrison Government is yet to comment on the recent pressure for tax reform

PricewaterhouseCoopers (PwC) is the latest to chime in on the Goods and Services Tax (GST) reform debate, which resurfaced after a New South Wales Government Federal Financial Relations review.

Last week, the NSW report, commissioned by State Treasurer Dominic Perrottet, suggested lifting or broadening the GST is more important than ever to help the Australian economy recover from the COVID-19 crisis.

On the 20-year anniversary of the introduction of the GST, the review proposed that the tax should be expanded into currently-exempt services, like healthcare and education, or the rate of the tax should be increased, or both. Stamp duty would be scrapped in return.

Today, PwC released its own proposed tax reform which it claims could boost Australia’s revenue by between $14 billion and $40 billion. The PwC paper says less-efficient taxes should be scrapped and the GST bumped to 12.5 per cent instead of the flat 10 per cent rate that has been unchanged in its 20-year history.

“Even prior to COVID-19, Australia’s tax system was ill‑equipped to support a growing economy, due to a number of structural factors, including an over-reliance on personal and corporate taxes,” the PwC report said.

PwC said its latest analysis of the GST found that reform is possible without adversely impacting overall equity within the community. The PwC analysts said the $40 billion revenue boost could come from broadening the GST base to cover five extra categories — namely water and sewage, childcare, health, education and food — and raising the rate to 12.5 per cent.

Low-income concerns

While state governments would benefit greatly from a GST hike, a key concern around an increased base and rate is the adverse impact it would have on low-income households, which have already been dealt a heavy blow by the COVID-19 pandemic.

The NSW opposition leader challenged the treasurer’s calls for a GST hike, tweeting last week:

Dominic Perrottet, no one wants a GST increase. Rule it out. pic.twitter.com/DPBA3CmNvr

— Jodi McKay (@JodiMcKayMP) July 3, 2020

Making groceries and essentials suddenly more expensive would disproportionately affect those doing it tough compared to other groups.

To offset this concern, the NSW report suggested additional social security payments could be made to these households if the GST was increased. Yet, the report failed to mention the extra cost of transferring a portion of the extra tax revenue to those in need — raising concerns that the tax reform might have some extra hidden costs.

Companies under the radar

Interestingly, neither the NSW review nor the PwC report paid close attention to company tax, despite a key paper which helped form the review indicating company tax is one of only two taxes with a negative marginal excess burden. Essentially, this means it is one of the only types of taxes that are not economically damaging.

The Centre of Policy Studies (CoPS) paper said the revenue raised from company taxes in Australia actually imposes an average welfare gain in contrast to other national taxes like personal income tax and the GST.

Yet, the recent push for tax reforms does not propose addressing any of the many loopholes companies can take advantage of to get out of paying tax. A December 2019 report from the Australian Taxation Office (ATO) revealed that out of 2214 companies examined, roughly a full third did not pay any taxes.

Many of these cases were due to government offsets, reconciliation items, and prior-year loss deductions.

This, of course, begs the question: if company taxes are so beneficial to the economy, why are consumers being asked to take on the burden of tax reform while big entities get away scot-free?

The Morrison Government is yet to comment on the recent pressure for tax reform.