Don't hold breath for change in GST
Altering this tax has not worked well in other countries.
It is best to regard the GST as a sleeping dog best left untouched. However, a growing number of economists and public policy commentators have proposed increasing the existing 10 per cent GST rate, or extending the GST tax base to currently tax-free items such as fresh food or education and health services.
Former Treasury secretary Ken Henry recently argued that consumption taxes need to increase to fund government spending as the population ages.
Others argue that a GST increase can provide additional revenues to be spent, and should also be used to switch the Australian tax mix away from distorting federal and state taxes.
The government-funded think tank, the Grattan Institute, released a study advocating a broader GST base, with cuts to income and company taxes in return.
Former federal opposition leader John Hewson recently nominated a preference to raise the GST rate to 20 per cent to help fund similar tax reform measures.
Various business groups, such as the Business Council of Australia, have called for increasing GST to compensate the states for any future cuts to stamp duty or even payroll tax.
These demands are motivated by the mantra of conventional public finance that low tax rates applied to a broad base will help ensure that government revenue collections are optimised.
If a broad base applies to a tax which is less mobile or manipulable by those to be taxed, then, the theory goes, all the better for revenue-raising potential.
Taxes on consumption are often seen as lucrative revenue sources because consumers need and want to feed, clothe, house, transport and entertain themselves, whereas capital and labour owners may avoid taxes by accumulating less capital or working fewer hours.
But this idea can only be stretched so far, with studies of European consumption tax increases showing that rising tax rates have, in fact, been associated with lower consumer spending and greater tax evasion and avoidance activities.
In other words, the ''Laffer effect'' of increasing tax rates eating away at revenue-raising potential applies to consumption taxes as much as to capital and labour taxes.
Even if hiking the GST rate or extending the base delivers sufficient additional revenues, the size of government increases as politicians use the extra revenues to extend existing programs and services or deliver new ones.
Apart from the distortionary effects of increasing taxation on economic activity, governments would likely spend their GST windfalls on labour-intensive, low-productivity public services which drag down on economic performance.
Knowing that governments can obtain extra revenues would also encourage special interest groups to lobby politicians for their preferred spending configurations, rather than spending their time on more productive activities.
Therefore it is unlikely that additional government spending based on increasing consumption taxation would foster strong economic growth in the long run.
An alternative perspective of taxation reform comes from the public choice school of economics, most commonly associated with the work of Nobel Prize winning economist James Buchanan.
If the assumption is made that governments seek to maximise their revenue take at every turn, it is then desirable to maintain some tax exemptions and loopholes enabling taxpayers to avoid paying extra revenue to big spending governments.
According to the public choice view it is also sensible for taxpayers to resist increasing the GST rate, or extending the base to fresh food, education or health, should they wish to constrain public sector growth.
In what could be best described as their ''Madisonian moment'', John Howard and Peter Costello originally legislated to lock in the GST rate and base so that any changes could only be made with the states' approval.
So far this scheme has proven successful in blocking consumption tax increases regularly seen in other countries, since the states' desire for more GST revenue is pitted against the federal government's reluctance to bear the political cost of legislating for a higher GST rate or broader base.
For as long as the Howard Costello legislative safeguards remain firmly in place, it is unlikely that Australia will bear the brunt of a heavier consumption tax anytime soon.
The obvious solution for governments expecting a tidal wave of increasing spending pressures over the coming decades is therefore to reduce this spending and reinvigorate private sector activity, rather than wait for a GST increase that may never transpire.