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Turnbull government using 'shonky reasoning' on tax

Stephen Koukoulas

The Turnbull government and its friends are manufacturing some shonky reasons why hiking and broadening the goods and services tax is a good idea.

Among them is the ‘need’ to raise more tax revenue from money people spend so that income taxes for those in the workforce can be cut, reversing the phenomenon of bracket creep.

Bracket creep is the concept in which people occasionally move into a higher tax bracket when they get a pay rise.

Also read: Compensation if GST increases: PM

While giving back bracket creep via income tax cuts may have some merit, using the GST to do it does not.

The very structure of the GST embodies implicit bracket creep for everyone, even who do not pay any income tax.

Bracket creep for income earners, by definition, only applies to people in the paid workforce who earn more than $18,200 a year (the level of the tax free threshold).

In other words, bracket creep will only even impact on approximately 40 per cent of the population.

Also read: GST rise better than income tax hike: poll

The GST, on the other hand, applies to 100 per cent the population be they pensioners, children, the unemployed or disabled when they, or someone on their behalf, spends money.

This is where the notion of hiking the GST is regressive. That is, low income earners pay more of their income on the tax than high income earners.

And the GST has a form of ‘creep’ for the simple reason of inflation.

Inflation in Australia rises by around 2.5 per cent every year, on average, meaning that the basket of goods and services that you and I buy each week or month incorporates a larger amount of GST as prices rise.

Think of GST creep this way.

When you spend $100 today on items that attract GST, you will pay an extra $10.00 tax at the current 10 per cent rate.

Also read: Come clean on GST, Bowen tells treasurer

A year from now, because of inflation, the price of those items will have increased to $102.50 (up 2.5 per cent).

When you go to the check out to pay, the amount of GST has increased to $10.25.

Spread this across the economy and compounding the effect of inflation over many years and you can see how GST inflation creep delivers a river of cash to the government.

No one is seriously arguing that the GST rate be adjusted so that inflation doesn’t push people, especially the poor, into paying higher tax, simply because prices increase.

Also read: GST changes are tax shifting: Greens

It would be counter-productive and hugely expensive for any government looking to balance the budget and fund the ever-growing call on finances for education, health care, infrastructure spending, defence and the like to do this.

Why the bracket creep argument is relevant to income tax rates is perplexing, especially with the Turnbull government facing on-going budget deficits and a pipeline of government spending that is growth rapidly.

It could simply collect the extra tax from bracket creep and use it to lower the budget deficit.

My hunch is that the government simply wants to hike the GST and perhaps broaden the items covered and it is making up reasons, any reasons, to help validate the argument for a hike in the GST.

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks and as economic advisor to the Prime Minister of Australia.