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So how does one judge the success or otherwise of a new tax regime?

By Paul Stacey - posted Tuesday, 1 July 2003


This is a valid question now that we are three years into GST. Clearly, there are as many ways to answer that question as there are perspectives. A political assessment might, for example, focus on the absence of articles in the press concerning GST, or alternatively their presence depending upon one's political allegiance. On that basis GST is a success, at least for the Liberals.

GST at its inception was a highly politicised tax; newspaper stories on the subject abounded. Nowadays headline articles on GST are few and far between. The last "page one" GST article I recall was "Surprise GST slug for property developers" (AFR, 29.04.2003) although I'm told there has been one other since. This article, about the margin scheme, only made the front page due to the journalistic coup of obtaining a "leaked" document. That much is evident from the placement of the article reporting resolution of the issue, namely page 74 - "Tax Office ruling lets developers off GST hook" (AFR, 23.05.2003). If the problem itself merited page 1 then surely its resolution merited similar prominence?

Other perspectives, or measures, one might choose include the striking absence of both legislative amendment and litigation. Surely, these are indicative of the GST regime's success?

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Taking legislative amendments first. Presently there are only four announced GST measures slated for legislative amendment this calendar year and beyond. And all of these are "so what" amendments. That is, while the measures may be important for those who are directly affected their impact is narrowly focused and they are not of systemic significance. Does this not indicate that the GST Act is a good piece of legislation?

Yes, and no. The GST Act was a hurried piece of legislation. It still contains some fundamental flaws. The special rules concerning the GST treatment of vouchers, namely division 100, do not, by common consent, work. Vouchers are a widely used promotional device. The flawed legislative provisions therefore potentially impacts many hundreds, if not thousands, of retailers.

If so, then why hasn't the GST Act been amended to rectify this and other problems? The answer is because GST remains a highly politicised tax. The Federal government, in the author's view, does not want "page one" GST articles; ergo, no significant legislative amendment. One unfortunate by-product of this "political environment" is that the administrator of GST, the Australian Taxation Office (ATO), is forced into ever more unconvincing interpretations to make the status quo "work". The ATO's recent ruling on the GST treatment of vouchers GSTR 2003/5 is a good example.

The absence of GST litigation is also noteworthy. There has not been an avalanche of GST cases. Moreover, the Australian Taxation Office test case program, under which the ATO funds cases involving contentious issues so that these can be resolved by a court, does not presently list a single GST case (as far as the author knows). Does this not also indicate the regime's success? Not so. Rather this is due to a confluence of factors, the discussion of which is beyond the scope of this article.

The perspective the author takes in the balance of this article is to take a look at "the financials". What does some quick and dirty number crunching tell us?

Financial year
 
Estimated Revenue*
$bn
Actual Revenue#
$bn
Variation
+/-(%)
 
Revenue Growth
(%)
Inflation Rate@
(%)
GDP Growth@
(%)
2000-01
24.11
24.35
+ 1.00
-
6.00
1.61
2001-02
28.32
26.63
- 5.97
9.36
2.80
4.08
2002-03
28.86
30.46
+ 5.54
14.38
3.25
3.00
2003-04
-
31.70
-
4.08
2.25
3.25
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* Source: Tax Reform - not a new tax, a new tax system, August 1998, figures adjusted for GST-free treatment of food and other changes costed in the Further Supplementary Explanatory Memorandum to the GST Act.
# Source: Final Budget Outcomes 2000-01, 20001-02, and 2003-04 Budget Paper No.3, figures for 02-03 and 03-04 are current estimates.
@ Source: Reserve Bank of Australia, Consumer Price Index - Year end percentage rate and Budget Strategy And Outlook 2003-04, Budget Paper No.1 for estimates of the inflation rate and GDP Growth rates for the 02-03 and 03-04 years.

Certainly, the data used is crude - headline revenue numbers only. The analysis is also unsophisticated - I am a GST specialist, not an economist. Even so, the analysis is revealing.

The first point to be made - and one which is made in the absence of knowing precisely how those figures were "massaged", is that the Treasury forecasting team seem to have got it pretty well right. Yes, there have been some "unders" and "overs" in terms of revenue projection, but they more-or-less balance one another out over the three-year period. The net variation of estimated to actual revenue over the 3 years is approximately +0.57 per cent. Given that revenue forecasting is by definition an imprecise science that ain't a bad result.

The second point is that GST is a growth tax. In nominal terms GST revenue is expected to grow at an average rate of 9.27 per cent per annum over the three years to 03-04. This is at a time where the inflation rate is expected to average 2.76 per cent and Gross Domestic Product (GDP) 3.44 per cent over the same period. Thus GST is a growth tax in both nominal and real terms and that has a number of implications.

For one, it suggests that GST has indeed secured the touted "cash economy dividend". This was the claim that those working in the black economy would be compelled to pay at least some, or a greater amount, of tax. This they would do by paying GST embedded in the purchase price of goods and services they consume. They would also arguably be more easily identified by the audit trail provided by GST.

The existence of the "cash economy dividend" can be surmised from the excess of the top line or nominal GST growth rate over and above the combined inflation and GDP growth rates. The nominal GST growth rate indicates the extent to which GST extracted more dollars out of "the whole economy" than expected. Insofar as that was due to inflationary and real growth in the formal economy, this is indicated by the combined inflation and GDP growth rates. The excess over and above that implies penetration of the black economy, all things being equal.

Take for example the financial year ended 30 June 2002. The nominal GST growth rate was 9.36 per cent. The combined total GDP growth and inflation rates was 6.88 per cent (2.8 + 4.08). In reality it is unlikely that the whole of the 2.48 per cent excess is explained by the "cash economy dividend". But even if it only explains 50 per cent of the excess that is still a whopping $330 million (2.48 per cent x $26.63 bn x 50 per cent) for the year.

There is therefore some truth to the Federal government's assertion that the States and Territories are financially better off under GST - to the tune of $88.7million in 2002-03 (estimate $269.6 million 2003-04) than would otherwise be the case, although that is somewhat obscured by the Budget Balancing Assistance. Or as members of the Federal Government repeatedly assert whenever the opposition challenges GST, GST does indeed go to paying for more hospitals.

That said GST is unlikely to be a growth tax of the magnitude that some predict, in the absence of an increase in the GST rate. In the short term the Federal Government has predicted a 70-odd per cent decline in the nominal growth rate from roughly 14 per cent to 4 per cent. The reasons for this predicted decline are not made clear.

In the longer term there are features within the GST Act itself which are likely to constrain revenue growth. The age profile of the Australian population is expected to tilt towards the elderly. An ever-increasing proportion of both public and private expenditure will therefore be diverted to health care. The supply of health-care services will not yield any GST revenue to the States and Territories; they are GST-free. Therefore, somewhat ironically, while GST provides funds for health care, the provision of health care deprives the states of GST funds for health care.

Should state governments predicate future expenditure on the basis that GST revenues will continue to grow at a rate over and above economic growth they are likely to be disappointed. All things being equal it will be necessary for them to either rein in expenditure or increase the rate of GST. Yes, the States and Territories must unanimously agree any increase to the rate of GST. However, as they have much to gain and will bear little of the political cost such unanimity is likely. The federal government must also agree, but it has little to gain and will suffer most of the political fallout. Accordingly, there is likely to be an impasse. Thus we may see the intergovernmental agreement scrapped such that GST revenue goes to the federal government and intergovernmental state funding reverts to a system of grants.

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This article is a modified version of an article published in the July 2003 issue of Australian GST Journal.



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About the Author

Paul Stacey is a Senior Tax Writer with ATP and Technical Editor of Australian GST Journal

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