Chapter 16

Conclusions

Weaknesses of the Natsem Analysis - Conclusions Of Democrat And Labor Senators

The NATSEM analysis fails to deliver the data in the form required by the Committee. The result of this is that the impact of the GST on low income households is significantly understated, with many shown as "winners" who, with full analysis, would have been losers. This point was acknowledged by Harding in her presentation to the Senate Committee.

In its discussions, the Committee members were under the clear understanding that the data provided by NATSEM would present the results for the first year of the ANTS package rather than the second. Further, the Committee had expected that the data be adjusted to take into account the differing expenditure patterns in the HES not just of each cameo group, but of income levels within groups. This was in line with the advice to the Committee provided by NATSEM in the December report on modelling which stated that:

"Low income people spend their income in different ways to those on high incomes. For example, most food and clothing items are currently not taxed under wholesale sales tax, but will be taxed under the GST. Analysis using the STINMOD-STATAX model for 1996-7 suggests that the average Australian family spends 18 per cent of total expenditure on food. However, the picture does differ significantly by income level. Thus, households with incomes below $450 a week spend 22.5 per cent of their total current expenditure on food, while those with incomes above $450 a week spend 17.7 per cent of their total expenditure on food."

Warren and Harding in that report also informed the committee that:

"There is also an issue about the timing of price rises. It appears that the expected price increase in 2000-01 is greater than that expected in 2001-02, and that the latter has been used in the construction of the cameos."

It was the Committee’s clear understanding that both of these issues would be addressed in the NATSEM modelling. Indeed, it was commissioned for that primary purpose. However, it appears that NATSEM had legitimate doubts about whether the HES data was sufficiently robust to model the cameos with their detailed income levels. This concern was never passed on to the members of the Committee. If it had been , the Committee would have commissioned modelling looking at quintile or decile distributions which would allow the income effect to be reflected. It was never the intention of the Committee that NATSEM should assume an average spending pattern for each income group. To assume that an unemployed person has the same spending pattern as a person on $150,000 a year as is assumed in Cameo One is a complete fiction, and discredits the validity of the analysis.

It is a pity that while NATSEM focused (without discussions with the Committee) on the issue of how the inclusion of tobacco and housing in the analysis affected outcomes, they failed to provide a sensitivity analysis of how inclusion of income effects affected the overall outcome. This failure, which seriously affected the validity of all estimates on low incomes, brings into serious question the validity of the modelling exercise and the independence of the report.

The Committee notes that Harding in her evidence to the Committee acknowledged that the failure to include income effects would result in the understating of the impact of the GST on low income earners, and that the figures provided are only an indication. Indeed, she suggested that any figure showing a gain of 1% or less was suspect on that basis.

It is a pity that the NATSEM analysis is so incomplete in terms of providing the impact of the GST on low income earners as at July 2000. Were the following issues taken into account, the analysis may have been more complete:

a. Expenditure patterns change with income levels:

While the HES data was inadequate to support disaggregation to the level required to replicate 21 income levels of the hypothetical cameos, it has been seen to be robust enough to provide analysis on a quintile or decile basis for different household groups. David Johnson of the Melbourne Institute and Neil Warren of ATAX have both produced such analysis. The impact of a GST by quintile is summarised in the following table:

(*Average price effect as percentage of average household expenditure. Johnson has modelled the ANTS package in 1993-4 dollars assuming the inclusion of tobacco and housing.

@ ATAX modelling for ACOSS of a 10% GST abolishing WST,FID and BAD in 1996 dollars, excluding tax cuts, modelled as a percentage of average expenditure. ATAX and the Melbourne Institute provide different income ranges for the quintiles.

The table shows a striking similarly between the two modelling proposals in terms of the much higher impost of a GST on the bottom two quintiles (incomes of less than about $318 a week in year 2000 figures). It suggests that the bottom quintile (incomes below about $213 a week in year 2000 figures) faces a price impost from the GST that is 54% greater than the average. That would be enough to make all unemployed singles and couples losers in the cameos, and all singles and couples on low incomes without any social security payments losers as well.

b. The impact of higher CPI in year 2000 is not accurately replicated in year 2

NATSEM assumes that the lower CPI effect of 2% in 2000/01 offset with compensation of 3.5% replicates a higher CPI of 2.5% in 2000-01 with higher compensation of 4%. However, this simply does not happen as a matter of course. Comparing Option 3B with its CPI of 2.0% with Option 4B with its CPI effect of 2.6% (which is very close to Treasury’s first year estimate of 2.5%) for three social security beneficiary groups shows the extent to which the tables understate the GST impact by focusing on the second year.

* Cameo 1 – Single income earner with no private income; @ Cameo 10 – Dual income earner 50/50 split no children)

Looking at these two simulations of the CPI effect forecast for Treasury by 2000 and 2001, the use of cameos for 2001 appear to understate the impact of the GST by $0.72 a week (or 0.4%), on single unemployed by $0.56 a week (or 0.4%) and for unemployed couples by $1.64 a week (or 0.5%). That suggests that the use of 2001 figures for compensation purposes understates the need for compensation by about 0.4%.

c. Tobacco and housing effects:

NATSEM argues that tobacco and housing should not be included in the calculation of CPI used for compensation. This position is not supported by ACOSS or by David Johnson of the Melbourne Institute in his modelling, nor earlier evidence given to the committee by Professor Harding.

Pensions and social security benefits have always been adjusted for movements in CPI. This has occurred after each increase in tobacco excise has fed into the CPI. It would be an appalling precedent if CPI were to be discounted for social security beneficiaries on the basis of an adhoc unrelated policy consideration.

Further, the tobacco increase raises about $300 million which is part of the funding for the other tax cuts and compensation.

Housing is an important cost for low income earners. Yet, the benefit from the First Home Buyers scheme will not benefit low income earners because they do not have the income to support home purchases. According to the ABS, about 6 per cent of households in the bottom two quintiles have a mortgage, as compared to 40 per cent of households in the top two quintiles. Indeed, three quarters of all home buyers are in the top two quintiles. This highlights how it is inappropriate to discount the cost of housing services to low income earners for the benefit of a scheme that benefits almost exclusively higher income earners. From the point of view of calculating the impact of a GST on low income earners, the First Home Buyers Scheme is largely irrelevant.

In recognition of these weaknesses, Professor Harding and Warren both concede three are many hidden losers from the tax package.

LABOR SENATORS CONCLUSIONS

Summary

After making a full and thorough assessment of the evidence given to the Inquiry, and in considering that evidence against three criteria, those being: The universally accepted principles that underlie a progressive taxation system, the Government’s own declared rationale for the proposed GST, and the committee’s terms of reference; we conclude the Government’s GST to be:

• Irredeemably unfair;
• Excessively and inherently complex; and
• Without such benefits elsewhere as might render those disadvantages tolerable.

Measures which involve genuine tax reform are supported by Labor. Two of the Bills referred to the committee have already been passed by the Senate with the support of Labor.

The evidence to the committee has shown that:

• The inflationary impact of the GST package will be at least 4% in the first year, not 1.9% claimed by the Government before the election;
• As a result, workers are likely to seek wage rises to compensate for this higher inflationary effect;
• Up to 120,000 jobs will be lost;
• The most severe job losses will be experienced in Tasmania, Queensland and regional Australia;
• Estimates of the number of Australians made worse off by the package range up to 2 million;
• The promised compensation for pensioners, veterans and disability pensioners will rapidly erode to nothing;
• Many self-funded retirees will be worse off;
• The GST discriminates against credit unions and other competitors to the big banks - it will cause interest rates and fees and charges to rise;
• The GST package will damage the capacity of local government to provide vitally needed community services;
• The disparity between country and city petrol prices will increase;
• The GST package will encourage business to use more heavily polluting fuels at the expense of more environmentally friendly fuels;
• Many health and education costs of families will rise;
• Charities, community groups and sporting associations will face higher costs and have to cut their activities;
• House prices, rents and the cost of home renovations will rise;
• As well as being unfair, the GST has been condemned as devilishly complex;
• The GST will reduce the competitiveness of small businesses and increases their paperwork burden; and
• Professional taxation bodies have called for the GST legislation to be re-written and delayed.

Introduction

The ANTS package is an extensive and complex package of proposed changes to the Australian taxation system. In the first instance then, it raises the question, ‘how should such far-reaching changes be judged ?’

In order to make a decision, Labor has set out three criteria against which the committee evidence should be assessed. The first comprises the universally accepted principles of sound taxation. The second criterion is the Government’s own declared rationale for the GST package. The third comprises the obligation placed on the Inquiry by its terms of reference.

First, over the more than 200 years since Adam Smith, the universally accepted principles of a sound taxation system have been equity, efficiency and simplicity.

• Equity meaning taxes are raised in a fair and progressive manner according to the capacity of the taxpayer to contribute;
• Efficiency, referring to the ability of the taxation system to promote economic efficiency in the allocation of resources across the wider economy and;
• Simplicity, meaning that the tax system is easily understood and therefore tax obligations are not costly for taxpayers to comply with, or for Government to administer and police effectively.

More recently a fourth principle has evolved: certainty. This could be taken within the meaning of "simplicity" as set out above, but has force in its own right in the sense that taxpayers or tax-paying entities are able to determine with certainty what their tax liabilities are, and arrange their behaviour with confidence accordingly.

The GST package failed all of these tests and should be rejected on the basis of tax principles.

The Government argues in support of the need for the GST on the basis that the current tax system is broken and in need of far-reaching change. The Prime Minister has announced that the GST needs to meet the criteria he describes as: incentive, security, consistency and simplicity. (ANTS p.15)

• Incentive to work, save, invest and compete;
• Security of future revenue growth to provide sounder finance for Government services;
• Consistency in the treatment of different business structures, investments and sectors of the economy so as to avoid distortions to investment decisions and/or consumer choices; and
• Simplicity in the traditional sense as defined earlier.

Evidence to the committee clearly demonstrates that the GST does not fulfil the Prime Minister’s own criteria.

Thirdly, the Inquiry’s terms of reference require the Select Committee to report on "..the broad economic effects of the Government’s taxation reform (sic) legislation proposals with regard to the fairness of the tax system, the living standards of Australian households (especially those on low incomes), the efficiency of the economy, and future public revenues".

The overwhelming evidence presented to the committee is that the GST will reduce the fairness of Australia’s tax system, reduce the living standards of large numbers of Australian households, will have negligible or nil impact on the efficiency of the economy and will reduce, in total, aggregate future public revenues. Clearly the GST package fails these tests as well.

UNFAIR

The GST is a Regressive Tax

The GST is a flat rate tax and like all flat rate taxes the lower a person’s income, the greater the impact of the tax on that person’s living standards and hence their personal well being. This basic dictum makes the GST regressive by its nature. This is why compensation is necessary – even the Government acknowledges that fact.

As well as a flat tax being inherently regressive, the Government’s broad GST proposal is doubly unfair as it brings into the indirect tax net the essentials of life which are currently untaxed. Low income households will pay much more GST as a proportion of their income than will high income households. This will hit hardest those least able to afford it, those on low incomes such as the unemployed, the retired and low paid workers with children.

In response to the regressivity of the package, the Government proposes a complex system of compensation comprising income tax cuts and increases in social security payments. This so called compensation is also highly regressive and totally inadequate for large numbers of low and middle income Australians.

The tax cuts for higher income households far outweigh the increases in social security payments for lower income households. Examples from the Government's own ANTS calculations show:

• A single person earning $100,000 gets an extra $64 a week – twenty five times the weekly benefit of the lowest income single person.
• A couple with no children earning $100,000 gets $80 a week; five times the benefit that the lowest income single income family with three children gets.

Under the Government’s proposed income tax changes, the top 20 per cent of income earners get over 50 per cent of the benefits from the proposed income tax cuts. That leaves 80% of income earners with less than 50% of the proposed benefits.

Compensation

Evidence to the committee confirms there are significant losers from the tax package even after the so called compensation is taken into account. ACOSS has estimated these losers to total at least one million households

Even Treasury has confirmed that many people cannot be compensated due to the fact that they do not have a relationship with Government that provides a channel for compensation. Those in this situation include:

• Retirees living off their own savings or superannuation;
• Working-age people supported by workers compensation or transport accident compensation;
• The widowed bringing up children by drawing down life insurance payments they received upon bereavement;
• New migrants;
• Many students living off non-government funded scholarships;
• Young Australians up to the age of 21 living at home; and
• Low income farmers.

It is estimated that these groups comprise up to another one million Australians who will not be able to be compensated for the effects of the GST

The Compensation Erodes Away

On top of this evidence, respected academics Professors Warren and Harding, business economists Mr Geoff Carmody and Mr Mitch Hooke and the Treasury have each independently confirmed that the already inadequate compensation for aged pensioners, veterans and disabled pensioners will erode to nothing within a few years.

This is considered unconscionable by Labor, and is grounds in itself for the rejection of the GST and related legislation. This attempted sleight of hand is clear proof that the Prime Minister has no intention of maintaining so called compensation into the future. Put simply, no compensation can ever be guaranteed to endure permanently and therefore the regressive GST should be rejected.

Cost Savings will not be Passed on in Full

Furthermore, the basis of the Government’s published calculations of the impact of its proposals on various groups in the Australian community have been shown to be absurd.

In particular, the notion that the benefit from abolishing wholesale sales tax will be fully and immediately passed on to consumers is totally discredited. This might be how Treasury’s model works. It is definitely not how the real world economy works. Evidence by the ACCC completely refuted the Treasury assumption. In fact, the ACCC could not name a single industry that was perfectly competitive in the way the Treasury model assumes.

A more realistic assumption of a 70% benefit pass-on to consumers conducted by Professors Warren and Harding and based upon the NZ experience showed that all pensioners, most self funded retirees and many families with children will lose heavily under the ANTS package.

There is only one possible conclusion: The proposed compensation is inadequate, and it is irredeemably inadequate, because any compensation offered cannot be guaranteed to last permanently.

UNDULY COMPLEX AND WITH UNINTENDED CONSEQUENCES.

Business

Many business organisations who appeared before the committee asserted their support for the GST package, but simultaneously many claimed that changes are required to the legislation to protect against adverse consequences.

There is also evidence that many of these groups are privately pursuing significant amendments to the package whilst publicly proclaiming support for it. This evidence supports what we know to be the complexity and widespread unintended consequences of the legislation. Why else would business be lobbying for amendments to the GST if this was not the fact ?

It cannot therefore be claimed by the Government that it has "broad" business community support for the GST legislation before the Senate.

This presents a unique dilemma for the Senate. When the Senate comes to vote on the package it is still not clear what it is being asked to do by a number of important organisations. Many organisations pointed to the need to change the bills to overcome difficulties in implementation or to avoid unanticipated costs to consumers. The following three examples highlight this dilemma.

Further, if reputable organisations are believed the Government itself will be further amending its own Bills.

1. The Society of Certified Practising Accountants amendments to the Bills

This body gave evidence that it fully endorsed the Government’s tax package, and that its members who would deal with the implementation and application of the taxation law on a daily basis, were reviewing the legislative expression given to ANTS in the 27 bills before the Senate. The Society indicated that although its review was not complete there would be a number of amendments it would seek. It undertook to notify the Senate Committee of these amendments. At the time of writing this report, no notification of those desired changes had been received.

2. The Insurance Council of Australia - $2 billion Unintended and Uncompensated Costs to Consumers.

This body identified what it deems to be an unintended consequence of the legislation as it currently stands. This will see an added cost imposed on insurance consumers of $2 billion. The Insurance Council stated that if the bills were passed as they stand their member insurance companies will have no choice but to fully pass on the $2 billion in the form of higher insurance premiums for policy holders. In fact the Insurance Council informed the committee that insurance premiums will begin to rise from July 1999 to take into account the $2 billion Government revenue grab.

If the Government tried to prevent the insurance companies recovering the $2 billion from policyholders, this massive retrospective tax bill would land on shareholders in companies such as GIO and AMP.

At the time of giving evidence the Insurance Council stated that it was in negotiation with the Treasury over whether this $2 billion unintended consequence would be rectified by amendments. They were arguing that as it was unintended the rectification would not harm the revenue estimates in the announced package. Just before going to print the Insurance Council has notified the Committee that their negotiations have not settled any of the issues and they are reconsidering their support for the Government’s measures. This will now ensure that insurance premiums will rise from July of this year in response to the GST.

3. The Taxation Institute of Australia – Delay Bill to sort out ‘devil in the detail’.

The Tax Institute argued that the best result for supporters of the Government’s package would be to defer the operational date of the new measures for six to twelve months in order to overcome what they call "the devil in the detail".

They emphasised that they had not taken a position on the issue of whether the package should be supported or not but had directed their expert attention to whether the bills effectively delivered the announced intent of the Governments’ ANTS package. They indicated there were so many flaws in the legislation that the safest course would be to defer the implementation date in favour of getting the legislation right.

In fact the Tax Institute recommended that the entire GST related package of legislation be the subject of review by an expert panel.

In giving this evidence they also indicated they were holding extensive talks with Treasury and that they believed the Government of its own motion would want to amend some of the bills when they came on for debate in the committee stages.

If a pre-eminent body such as the Tax Institute has such major concerns over the GST detail and believes it should be deferred, then so should the Senate. This ‘devil in the detail’ is grounds in itself to reject the GST package.

A proper consideration of the Government’s bills can only be undertaken when they are presented in their final form and after a fuller deliberation of the implications. Given the examples set out above this means after the Senate has seen any further amendments that the Government intends, or which expert organisations believe are desirable, and after there has been an opportunity to measure the so-called compensation to be delivered by the mooted tax cuts against the such issues as the unadvertised $2 billion hike in insurance premiums.

Local Government – Uncompensated Extra Costs

There are a number of organisations in a similar position to the Insurance Council of Australia but who are undecided as to how they will deal with the apparently unintended extra costs imposed on them by this tax package.

The capacity of Local Government to provide a range of services to local communities and their ability to respond to future community needs and expectations will be compromised as a result of the proposed GST.

The GST will impose additional costs on Local Government at a time when there is increased demand for community services. The ability of Local Government in rural and remote Australia to continue to supply much needed community services will be jeopardised.

Compliance costs for Local Government will be significant. Currently Local Government is exempt from the WST. Complying with the GST will require new accounting systems, new equipment and no doubt staff training.

Of particular concern is the GST treatment of community services supplied by Local Government for a nominal fee. Because a fee is charged, these services are to be subject to GST. The outcome of this can only be to the great detriment of those using Local Government services - prices will have to rise or services cut. Compliance costs will increase or services must be subsidised a full 100 per cent. Either of these outcomes will have a detrimental impact on Local Government revenues.

Regional Local Government – Even Higher Extra Costs

The Kalgoorlie-Boulder Council gave evidence to this effect and stated it was undecided as to how it should meet this extra imposition. Its options were – charge the same fee and increase rates to cover the GST, reduce staff or close and/or reduce the service, or pass on the cost of the GST.

Many local governments and quite a few other organisations are in a similar situation. Until decisions are made by them about these extra costs it will remain unclear whether there will be price rises, although the clear practical implication is that there will be. Due to these costs it is also inevitable that the GST will also result in employment losses in communities that can least afford them, mostly situated in rural and regional areas.

Local Government – Security of Funding

A further major concern is the security of funding of Local Government activities. Government grants have declined markedly over the last few years. The proposed devolution of local government funding to the States adds another element of uncertainty. The Government has proposed that this funding will be secure under a Memorandum of Understanding. Given the Government’s broken promises to Local Government on the exclusion of nominal fees from the GST, the simple fact is that this Government cannot be trusted. The Government’s guarantee that local government funding will be maintained, is as reliable as its "guarantee’ that GST compensation for pensioners will endure.

Small Business – Fearful of Compensation Cost Burden

The Council of Small Business Organisations of Australia (COSBOA) told the committee:

"A central position that COSBOA would take is that small business needs these costs (compliance) quantified by the public sector in order to explain them. We have gone way beyond the position where anecdotal or descriptive measures of these taxes are acceptable to small business. They need to see the numbers. They need to know exactly how much these processes are going to cost them, and neither public debate nor the government is producing that at the moment."

This one statement in many ways encapsulates the single biggest problem facing small business. What will be the compliance costs they will face under the GST ?

To date the Government has not been willing to quantify the impact small business will face arising from the compliance costs of the GST. At best all we have is the Government’s Regulation Impact Statement that forecasts just on $2 billion of recurrent gross compliance costs for all businesses, which after adjustments is estimated to be $210 per business per year on a recurrent basis.

Small Business – Compliance Costs Proportionately Higher

It is totally unrealistic that companies from the size of BHP to the local corner store will each face an annual GST compliance cost of only $210. This is dishonest and totally misleading. It is further misleading to claim as Mr Langford-Brown of the Institute of Chartered Accountants did that: "The additional costs simply to comply with the GST legislation would be a software package of approximately $150.". The year one cost to small business if the GST is introduced, will be such as to drive many operators out of business.

If the GST is such a simple piece of legislation to comply with, why are a number of business groups seeking amendments to the legislation due to its complexity and the impact it will have on their business members?

The evidence is overwhelming that it will be small business that will bear proportionately more of the GST compliance burden relative to big business. Small businesses simply do not have the economies of scale over which to spread the GST compliance cost burden as opposed to big business.

Small business will suffer the most under the GST and it is for this reason that the Government is refusing to provide costings of how much the GST compliance burden will be for them.

Health – GST on Non-Prescription Pharmaceutical’s

Symptomatic of the proposed GST as a whole is the complexity of the legislative provisions dealing with the GST treatment of health.

This is clearly demonstrated by the complex, confusing and contradictory GST treatment of pharmaceuticals, certain complementary medical services and ancillary services provided in hospitals. For example, under the proposals some pharmaceuticals will attract a GST while others will not. This will lead to patients seeking GP provided GST-free prescriptions rather than purchasing taxed medicines over the counter.

Given this anomalous situation one must question the manner in which the Government has sought to make health GST free. Quite simply the Government’s oft quoted claims of ‘simplicity in administration and compliance’ fail in the manner in which they have applied the GST system to health.

Health – Low Income Earners Most Effected

Of further concern are the Household Expenditure Survey (HES) figures which show that low income earners spend considerably more on health care than wealthier Australians. With the compensation package for low income earners having been shown to be so woefully inadequate, low income earners will not receive any compensation for their increased health costs.

Thus low income earners and people on fixed incomes and pensions will be financially worse off as a result, irrespective of health’s supposed GST-free status. Unlike the Government, we are concerned over the impact upon the general health of low income Australians as a result of the GST treatment of health services and products.

Many Services Taxed for the First Time

Contrary to claims that health will be GST free, many health care services and products will be taxed for the first time and this cannot be supported.

Education – A Tax on Learning

The GST’s impact on education means that it is a tax on learning.

The Government’s claim that education will be GST-free has been shown to be fraudulent. The proposed application of the GST to activities in the education sector indicates that the Government views education as a cost to be recovered rather than as an investment in the future of the nation.

The GST will apply to:

• School books;
• School bus fares;
• Tuckshop food;
• The food component of boarding fees;
• School uniforms;
• School shoes;
• School equipment hire;
• School recreational programs;
• Holiday camps;
• School sporting clinics;
• School stationery;
• Much private student tutoring;
• Many Adult Education courses and short skills training;
• Educational software.

The GST represents an attack by the Government on the right of ordinary Australians to receive a decent education.

The GST impacts severely on those educational programs which draw heavily on community participation for support, and those least able to either absorb the costs or assume the additional accountancy responsibilities which will be needed to keep school and community education programs operating effectively.

Education Funding Cuts Hurt

The GST should be seen in the context of several years of serious decline in government funding of the education sector. The education community has been under siege since 1996, with program cuts aimed at re-orienting all segments of the education sector – schools, colleges of technical and further education and universities – toward greater reliance on corporate finance sources. The GST on top of these developments will see a decline in participation rates in adult and community education.

There will be a heavy compliance burden which will divert scarce human resources from the ‘chalkface’ into administration. This will add additional responsibilities to the workloads of many people engaged in voluntary, but essential, work in the education sector.

Cost Impacts on Students

The GST will have a disproportionately heavy impact on those at the lower end of the income spectrum. We know that the Government’s compensation measures are totally inadequate. The GST as it applies to education fails to address the full range of important and necessary educational costs facing students and families, and in particular fails to recognise the costs associated with schooling.

Further, we note the evidence of the Australian Education Union (AEU) on the potential impact of a GST on low-income families with children at school. A survey by the Australian Scholarships Group identifies the items which such families most frequently report as difficult to afford. These items are those most affected by a GST. Educational opportunities will be limited and cost burdens on low income families will increase. The quality of education available to the less well off will be reduced.

Added to the GST burden on education is the fact that there are many students ineligible for a full Youth Allowance who nevertheless exist on extremely small incomes. The impact of a GST on these students and their families will be much greater than that applying to high-income families and individuals.

17-24 Years Age Group

It is interesting to note in evidence given to the Select Committee that no compensation was available to parents of any child aged between 17 and 24 years despite the fact that a very high proportion of young people are dependent or semi-dependent on their parents. At the Committee’s Canberra hearing, a senior officer of the Department of Family and Community Services was reminded that youth allowance legislation was passed by the Senate on a promise to Senator Brian Harradine that the new tax package would address the issue of families with dependent children aged between 17 and 21. The officer disclaimed any knowledge of how this undertaking given by the Government to Senator Harradine had failed to be honoured.

The simple fact is this Government cannot be trusted as has been shown by its broken commitment to Senator Harradine.

Equity and Access

The GST will impact severely on the quality, accessibility and equity of education. The GST will ensure that the educational opportunities for the less advantaged will be stymied due to the immediate impact of cost increases in education-related expenses. The GST as it applies to education is complex unfair and cannot be supported.

Non-Profit Organisations – Lifeguards and Scouts Taxed

The impact of the GST on the non-profit and charitable sector would be nothing short of devastating. Overwhelming evidence was presented to the Select Committee and the Senate Community Affairs Committee on the damage the GST would cause the non-profit sector.

The non-profit sector by its nature is reliant upon the good will of community members who volunteer their time to assist other less fortunate members of the community. The GST represents the most vicious attack on the ability of this sector to provide these much needed community services. Charities in particular fill a much needed service in the community through their humanitarian role in relieving human suffering and misery. This altruism is now under attack from the GST.

The most persuasive evidence as to this attack came from the Government itself in a letter from the Office of the Assistant Treasurer Senator Kemp, to the Chief Executive of Scouts Australia. The letter of the 22 February 1999 states "During ‘Jobs week’, Scouts appear to be acting on behalf of Scouts Australia as any payments goes to Scouts Australia. These activities are taxable in the same manner as if they were provided by a private sector organisation."

Despite subsequent denials from the Government, the fact is that under the legislation where a non-profit organisation performs a service which has a payment equivalent to 50% or more of a similar service provided by the commercial sector, that service will attract the GST. This is why many non-profit bodies argued that the market value test should be raised from 50% to 75% in order not to disadvantage services performed by the non-profit sector in the way that was confirmed by the Office of the Assistant Treasurer.

Further evidence from Mr Nance representing The Surf Life Saving Association (an Aussie icon) stated, "……from a Surf Life Saving perspective. Currently, if you hold your hand up off a beach in Australia and we are patrolling it, you get that service for free—you are rescued for free. If one of our helicopter services is called upon to rescue someone, the community gets that for free. To lose revenue through a tax reform like this will restrict our ability to provide those services for free. We are never going to charge for them, so they will be naturally reduced."

This is damning evidence on the impact the GST will have on an organisation that is dedicated to saving people’s lives. Rather than doing what the Surf Life Savers do best, saving lives, scarce resources will now be diverted to the administrative compliance burden they will now face due to the GST. Instead of patrolling beaches, surf life saving personnel will be filling in GST forms for Mr Howard and Mr Costello.

Ms Schultz speaking on behalf of the Port Adelaide Central Mission, the Adelaide Central Mission and Lutheran Community Care stated the following on how the GST would result in a reduction of services these three organisations provide:

"So the GST adds another process that is going to create an administrative burden for the sector and impose additional costs. Once again, we are going to see more pressure and reduction in services. For those who rely on community services, this means increasing frustration at being able to obtain needed services, being placed on waiting lists, being charged fees for services that they cannot afford and ultimately going without the supports that may assist them to escape the cycle of poverty…"

There are many more examples of how the GST will affect the charitable sector. What is clear though is that the GST will result in this sector having to reallocate scarce resources to the implementation of, and compliance with the GST - Resources that could be far better utilised in servicing the needs of the most disadvantaged members of our community.

The GST represents a double hit on the most vulnerable members of our community. Firstly, the Government's failure to provide adequate and lasting compensation. Secondly, charities and other non-profits will be forced to reallocate resources to cope with the costly administrative and compliance burden the GST will impose on them.

That burden will ultimately be borne by the disadvantaged and needy, through reduced services and assistance. This provides more than adequate justification to oppose the GST.

Financial Services – Aussie Homeowners Mortgage Rates Up

The most damning evidence on the impact the GST would have on the financial services sector came from the Mortgage Industry Association and in particular Mr John Symonds of Aussie Home Loans. Given the input taxing of financial services, mortgage originators such as Aussie Home Loans will be faced with an added cost impost not faced by much bigger major financial institutions such as banks.

The result in short will be higher interest rates, fees and charges for consumers, and a lessening in competition between the big banks and the mortgage originators. The GST in this context will destroy the only substantial competition that the banks now face. The GST will do for the banks, what the banks have been unable to do themselves, rid the market of non-bank competition in the mortgage home loan sector. This is not in the interest of Australian home buyers.

Credit Unions Disadvantaged – Banks Favoured

The same problems faced by the mortgage industry association equally apply to Credit Unions and Building Societies the other two major sources of competition to the banks. They too like mortgage originators will have no choice but to increase interest rates, fees and charges.

The Governments ANTS document asserts that the banking and financial services sector will benefit by some $1.6 billion a year through the proposed removal of Whole Sales Tax and certain other taxes. No evidence was presented to the committee in support of this claim, quite the contrary was the case as has been shown from the impact the GST will have on mortgage originators and credit unions. Superannuation funds and life insurance offices will also face additional costs under the proposed GST.

None of Australia’s largest banks presented a submission to the committee and when their representative body the Australian Bankers Association was asked to appear so that the committee could take evidence on their submission, they declined the invitation.

It is worth noting the statement by Mr Frank Cicutto the National Australia Bank Managing Director, "….We have a GST impost as I said, that will in effect increase our tax rate here in Australia, with no other offsets, by between 8 and 10 per cent."

If Australia’s largest bank cannot identify any savings from the GST, then the Government’s estimate of $1.6 billion in cost savings is more an exercise in wishful thinking than objective economic analysis.

The reality is the GST will ensure that the major banks regain their stranglehold over the Australian home loan market, which will see them free of competition and thus able to price their products accordingly. This guarantees higher home loan interest rates and fees and charges for Australian banking consumers. This cannot be allowed to happen and is yet another reason why the GST needs to be rejected.

Women and the GST*

It is arguable that the impact of the GST will fall more heavily on women because women in Australia earn less than men and will therefore benefit less from the proposed income tax cuts ie the large reductions on individual incomes above $38,000 give higher income individuals (mostly men) a greater proportional reduction in average tax rates while rate reductions between $6,000 and $38,000 (mostly women) imply much smaller reductions in average rates.

Professor Apps concluded that the proposed tax reforms will introduce ‘impediments and inflexibility into the labour markets where none need exist. Moreover, a fall in the female labour supply implies a decline in the future tax base for funding the age pension’. Further, evidence suggests that if female workforce participation falls household savings would drop dramatically.

The YWCA also expressed concern that women who choose to participate in the paid workforce, particularly those members of single income families with children under five, dual income families and those with children over five, are disadvantaged by the proposed tax reform package. The YWCA argued that the tax reforms should recognise that women mostly will continue to choose to seek to remain in the workforce, recognising that those who work part-time often do as much parenting and voluntary work as those with no paid work.

In Australia, women hold around 42 per cent of the jobs but they remain clustered in industries with low pay rates, particularly in the services industry. 76 per cent of women undertake casual or part-time work. Concerns were expressed that the tax reform proposals would impact in such a way as to reduce employment in areas where women make up a large proportion of the workforce. WETTANK stated:

Particularly the areas that will lose work, according to the Chris Murphy model or possibly the Monash model, are those which are very high employment areas for women, such as personal services, communications, public services, retail, entertainment, cafes and hospitality. The areas where there are many women in low paid jobs…are also those which are most likely, according to the models, to have been put up to show reduced employment.

The YWCA also expressed concern about the flow-on effect of the tax reforms on the community sector. In particular, the YWCA noted that the sector is dominated by women as paid employees, as volunteers and as recipients of services. Any adverse impact on the community sector will have an impact on women.

(*NB: This is taken from the report of the Senate Community Affairs References Committee)

ECONOMIC OVERVIEW

Many Australians know that the GST will hurt their own families or the families of their friends or relations. But they have been repeatedly told by the Prime Minister and his colleagues that that represents a price that has to be paid for the greater good of the Australian community as a whole.

This argument is not borne out by the evidence. There are no big picture gains that can be viewed as justifying the undoubted costs the GST would generate in terms of unfairness, complexity and ‘collateral’ damage.

The suffering that would be imposed on the victims of the GST would be all pain for no gain.

Employment

The Government has produced no credible economic modelling to corroborate its repeated assertions that its GST will unleash a surge of employment growth across Australia.

At the same time, respected non-government economic modellers have found that the Government’s proposed ANTS measures would destroy large numbers of jobs across Australia.

Monash modelling found:

• Up to 120,000 jobs could be lost in the early years of the tax package if wages rise in response to the higher cost of living from the GST;
• Any jobs that are created in the early years will be due entirely to the fiscal stimulus associated with the income tax cuts and not the GST; and
• A delay of just one year in passing on the full savings from reducing the wholesale sales tax will lead to an estimated 15,000 job losses.

The various economic modelling results presented to the committee did predict employment gains in some industries such as mining, non-residential construction and certain pockets within the manufacturing sector. But major employment losses were predicted from the GST package in areas such as residential construction, fast-food, tourism, entertainment services, arts and culture.

The job losses are predicted to hit rural and regional Australia with particular severity. The Prime Minister’s preferred modeller Mr Chris Murphy found that Queensland will lose 5000 jobs and Tasmania 1000. For Tasmania this is particularly devastating given that it has continued to lag behind the rest of the nation on all the major leading economic indicators and has not been a beneficiary of the current buoyant national economy.

Demographically the employment losses will impact most heavily on the 18-24 age group, on women and on indigenous Australians.

It would be unrealistic to expect that workers who lose their jobs in one industry sector because of the GST will automatically be able to find alternative employment in other industries and/or other regions. The ANTS package totally ignores the economic and social costs such displaced workers will face as a result of the GST.

It is obvious the Government does not propose to devote any resources to the re-skilling or other retraining initiatives, relocation assistance or regional development initiatives to assist workers or their families who will lose their jobs.

On 15 April 1999 the latest Consumer Inflation Expectation figures were released by Westpac bank and the Melbourne Institute. They reported further increases in their trend series for inflation expectations. Having stood at 3.2% in late 1997, expected inflation now exceeds 4.5%.

Inflation expectations were highest among those supporting the ALP or minor parities. The Melbourne Institute said "..this is most likely due to divergent views about the impact of the GST." Westpac’s chief economist argued, "This is important because a possible threat to on-going low inflation outcomes is rising inflation expectations. In terms of the consumer, this will filter through to final process via an acceleration in wage claims. The introduction of a GST and the associated inflationary impact will put upward pressure on nominal wages if consumers feel that the compensation package is insufficient and real disposable incomes will fall.".

The next step in the chain of GST consequences would be for the Reserve Bank to increase rates in order to dampen down inflation.

The simple fact is that on the single most important test for the GST being will it generate one more job? The answer is NO. As one of Australia’s most respected economists, Professor Dixon stated "….the introduction of the consumption tax in a balanced situation is job-destroying".

Given the Governments proposed new tax system results in the destruction of jobs it cannot be supported and should be rejected on this basis alone.

Balance of Payments

The Government’s proposed changes to Australia’s indirect tax arrangements would remove some relatively small amounts of tax which are currently embedded in the prices of Australia’s traditional goods exports.

But at the same time, the GST would worsen the international competitiveness of many of Australia’s new more modern and rapidly growing export industries such as tourism, education, health services and motion picture production.

At the same time the GST would stimulate additional imports of certain types of capital equipment which can only be sourced from overseas.

Treasury’s PRISMOD model does not predict an improvement in Australia’s balance of payments following an implementation of the ANTS package.

Not one piece of credible evidence was put before the committee from any source that the GST is the answer to Australia’s chronic current account deficit problem that has worsened under this Government.

On the question of promoting national saving, the GST package consists in the Government raiding future surpluses in order to fund income tax cuts thus resulting in substantial national dissaving.

The GST on any objective macroeconomic analysis will have negligible if any benefit to the Australian economy and will destroy jobs

Efficiency of Resource Allocation

The Monash modelling found:

• Any economic efficiency gains from the tax package will be negligible even under the most favourable assumptions;
• The package will cause a small decline in average Australian living standards; and
• The existing tax system will collect revenue faster than growth in GDP, so the need for a GST to meet Australia’s future revenue needs has not been proven by the Government..

What is clear is that the GST is not an economic panacea the Government would have the Australian public believe. Even the Prime Ministers own preferred modeller Mr Chris Murphy on the most favourable assumptions for the Government was only able to find a total welfare gain from the package of $607m or 1/500th of total consumption expenditure.

Black Economy Tax/Evasion

Contrary to the Howard Government’s repeated assertions, a GST is not an effective remedy for tax evasion, or to the growth in the cash economy.

In a major study of GST tax systems around the world, the International Monetary Fund (IMF) identified a range of methods by which such VAT-type taxes can be evaded.

The simplest techniques involved failure to register, or exaggerated claims for GST input credits and/or failure to report or fully report taxable sales. More complex techniques involved the forgery of GST invoices, trade in GST invoices between registered and non-registered buyers, barter and the creation of short lived bogus companies.

The IMF’s conclusion was, "Like other taxes, VAT is evaded…..increasing rates for VAT make the tax conspicuous and makes successful evasion all the more valuable to trader and public alike."

TRANSPORT AND THE ENVIRONMENT

The Government’s proposed tax changes will encourage business to use the more heavily polluting petroleum fuels at the expense of LPG, LNG and other more environmentally friendly fuels.

They will encourage private cars at the expense of public transport.

They will encourage more heavy transport vehicles onto Australia’s road, by shifting freight away from railways.

But for Australian consumers the prices of transport services other than airfares (which fall by only 0.8%) are predicted to rise, even on the Government’s own modelling: road transport up by 2.6%; rail up by 5.8%.

The Australian Conservation Foundation (ACF) told the Committee:

"This tax reform package is the only example in recent years of an OECD country introducing a net reduction in fuel and energy related taxes and charges. Even the conservative International Energy Agency has urged Australia to increase fuel taxes to curb energy consumption."

Recommendation

The Senate should reject the GST in its entirety.