MEDIA RELEASE: People right to be sceptical about GST rise

Latest polling shows that there is low support for a GST rise even with income tax cuts to offset it. People are sceptical about these trade-offs and rightly so, says Centre for Independent Studies economist Robert Carling.

“Experience supports the public’s scepticism,” Mr Carling says. “Any trade-off faces the risks of being reversed or eaten away over time.

“A trade-off between the GST and income tax faces the problem of government policy being inconsistent over time, and cuts being reversed by a future government decision,” he says.

“There is also a risk that income tax cuts would be reversed or dissipated over time by bracket creep. The end result would be a higher GST and the same (or higher) income tax as applied before the trade-off.”

“The experience is that income tax cuts accompanying introduction of the GST in 2000 and the subsequent cuts have been partially reversed and eroded by bracket creep.

“If there is to be a trade-off between higher GST and income tax cuts, how should the income tax cuts be structured to make them more durable and less subject to erosion by bracket creep?

“You need to both cut marginal rates and index thresholds automatically so bracket creep can’t occur.”

Mr Carling says that those who see a higher GST as providing the revenue to fund personal income tax cuts are likely to be disappointed.

“Political pressures to mitigate the ‘regressive’ nature of a GST increase would lead to a large allocation of revenue to over-compensation of pensioners and skewing of income tax cuts towards low incomes, leaving less available for cuts in the higher rates of personal income tax, let alone company income tax.

“The result would be more churning – people on low incomes paying more in GST and getting it (and more) back in higher social benefits.”

Mr Carling says the government’s inability to rein in spending would also have a damaging impact on the trade-off.

“As long as growth of government spending remains the problem it is, the pressure for a further GST increase and the reversal of income tax cuts would surface,” he says.

Robert Carling is a Senior Fellow at the Centre for Independent Studies.

Media Enquiries: Karla Pincott  kpincott@cis.org.au  0407 716 752