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Change the GST or not?

Comments on LAUREN WILSON "Tony Abbott dismisses fresh push to re-examine the GST", 20/09/2013, http://www.theaustralian.com.au/national-affairs/tony-abbott-dismisses-fresh-push-to-re-examine-the-gst/story-fn59niix-1226723309057

The current government prior to the federal election said GST will be included in its planned tax review and also said earlier GST won't change in this term of government and any change will need to get a mandate from the next election, although latter on it was changed to GST will not change.

My reading of the government's approach is that it will continue to say GST won't change until the review report is publically available  with recommendations that the GST should be changed. There appears a case that the GST should be changed to either replace some of the inefficient state taxes, such as stamp duty on conveyances, or to reduce personal income taxes.

Any changes to the GST whether it is to broaden the base, or to increase the rate should be traded with a reduction in some taxes so to keep the level of overall taxation roughly unchanged. The aim is to increase the efficiency of taxation rather than to increase the level of taxation.

There are two other important issues related to potential changes in the GST. One is there should be a compensation to low income earners through tax reduction to minimise its impact on them and at the same time to increase the incentives to work.

Another is that if the GST is to be changed, it would present an opportunity to change the GST distribution system. Fundamentally, the federal government should consider to distribute the GST on population shares and should move the fiscal equlisation role through another general grants in a trade off with the states to support GST changes.

Since the introduction of the GST, fiscal equalisation is done through GST distribution. Given that GST is fully provided to the states and the federal government does not have any direct benefit from GST one way or another, it lacks interest in how it is distributed.

By moving fiscal equalisation into using another general grants from the federal general revenue pool, it would have an interest in the size of the redistribution, and hence how it is done. More importantly, it would provide a circuit breaker for the disagreement between the states on how GST should be distributed.

I see this as a practical way to move forward on the GST issue. And it is likely that a change to the GST will on the card in the next election.

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