(Nov 12, 2015) The Federal government is considering an increase to the goods and services tax (GST) from 10% to 15% and possibly extending the GST to include health, education, real estate, fresh food and financial services. These areas are currently exempt from the tax.
Background on the GST
The GST is a “regressive” tax. It’s a flat rate tax that hits low-income earners more heavily for the simple reason that such taxpayers, and especially those supporting a family, usually spend almost all their income on everyday needs. Further, lower-income groups pay comparatively more than those on higher incomes.
Higher income groups are less affected by the tax.
It’s argued that keeping the tax burden low on the rich and on businesses increases employment. In this context economist John Kenneth Galbraith once observed: “It is as if the rich will only be encouraged to work if they are given more money, and the poor if they are given less.”
The government says it wants to increase tax revenue to reduce debt and overcome major budget deficits. The end of the mining boom has seen a fall in tax revenue, while the welfare and health budgets have grown.
If the Federal budget suffers from lack of revenue, the solution is not to raise taxes at a time when the economy is suffering from lack of demand. Collecting more tax from low-income earners will only make things worse. Under such circumstances, raising the GST, mainly from low and middle income earners, will only slow economic growth.
Rather, the solution is to stimulate growth. To that end, there is a better solution – major investment in infrastructure.
Professor Lawrence H. “Larry” Summers, US economist and former president of Harvard University, has repeatedly cited research by the International Monetary Fund that show if the government lifted investment in infrastructure by just 1% of GDP, the after five years, the government’s debt-to-GDP ratio would fall by 6%. (“Reflections on Secular Stagnation”, Larry Summers, speech to the Julius-Rabinowitz Center, Princeton University, February 19, 2015. http://larrysummers.com/2015/02/25/reflections-on-secular-stagnation/ )
In short, spending on infrastructures multiplies across the economy as businesses are lifted and unemployment falls. Then tax revenues increase and unemployment welfare expenditure falls.