Tax reform is a current issue

The Australian government has a budget problem. It's not always the problem they claim it to be so quickly here are the key problems:

1. The government does not raise enough money.  All budgets are a balance between income and revenue. Presently there is a budget deficit because successive Australian governments cut taxes and allowed some groups to have tax concessions which are politically difficult to remove.

2. The population of Australia is ageing. This will lead to the need to higher government spending in the future on services such as health and on benefit payments, such as pensions. There is also the likelihood that the working population will shrink, meaning fewer workers are available to pay the tax needed to raise revenue.

3. Commodity prices are falling. Australia relies on commodity exports to maintain its standard of living. The collapse in iron ore and coal prices means both Australia income and government tax revenue is falling.

Therefore action must be taken to establish a guaranteed revenue stream for the government. Reforming Australia's appallingly complex tax system, which has many built is advantages for vested interest groups, is essential. Everyone agrees on this point!

Th problem for politicians is that they can loose support if they upset voters by asking them to pay more. Therefore they are reluctant to make the tough calls.

One suggestion is that GST is raised to 15%, making everyone pay more. There are pros and cons.

Pros: GST is difficult to avoid, you pay it as you spend. It is cheap to collect, firms do a lot of the work for you and raising the rate makes little difference to collection costs. People don't notice when they pay it, it's in the price, so you get fewer complaints.

Cons: The tax is regressive. That means that the burden falls more heavily on the lower paid (lower income quintiles/deciles of the population) and so works against the goal of equity. If placed on goods with external benefits (positive externalities) it makes market failure worse.

An additional point is that if not applied equally on all goods it changes relative prices. Therefore goods without GST become more attractive to consumers and more resources are allocated to them, with fewer resources going to taxed goods. (This is how taxes work!) However an inefficient allocation of resources can result while the government are trying to do the right thing.

The Treasurer, Scott Morrison, is struggling with all of this as he prepares his first Federal Budget. He is concerned, according to the article below, with the effect of GST on Education and Health. Both are 'Merit goods' and they have external benefits. We wish to encourage increased consumption of both, not reduce consumption through tax.

The ABC cover the story here.

How Australia deals with the 'Budget crisis' is going to be a vital topic for VCE economists and a case study for IB students.

Questions.

1. What is the effect of raising GST on the distribution of income? (Goal of equity)

2. How does putting GST on health differ from putting GST on education? (Hint. Only private education will attract GST.)