Tax. Sorry to kick things off with a swear word. We hope you keep reading.
Taxes are a necessary evil. No one likes paying them, but most people enjoy at least some of the benefits. Like roads, schools, hospitals, aged care, police forces, fire brigades, local sporting facilities – all of these are at least partially funded by some form of tax.
A long dead Frenchman named Jean-Baptiste Colbert once nailed the issue of taxation – and in particular the challenge for a tax office in collecting tax – by writing that “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.”
In case you were wondering, the taxpayer is the goose.
As this quote suggests, the best taxation is one that people either (i) do not realise they are paying; or (ii) are happy to pay. This is one of the reasons why, almost 20 years ago, Australia introduced its ‘goods and services tax,’ or GST. The GST is known as a ‘consumption tax’, because it is levied on people when they buy something (or consume it). Most people, most of the time, are reasonably happy to be buying the kinds of things that GST is applied to. Concert tickets. New cars. Bottles of wine. You get the picture.
As you can imagine, the introduction of the GST was controversial. At the time it was introduced, an exemption was allowed for certain things that the government did not want to discourage people from purchasing. Fresh food was chief among them, although ‘unfresh’ food such as chocolate was not exempt. Medical services did not have GST applied to them. One contentious area to which the GST was initially applied was women’s sanitary items (tampons and sanitary pads). It took until 2018 for the complexion of the Federal Parliament to change sufficiently for the GST to be removed from items that women (and men) rightly argued were really health products.
The benefit of a consumption tax does not just stop with this ‘feelgood’ factor. Another key aspect of an effective tax is that it is difficult to avoid. The main other type of personal tax paid by individuals is income tax. Employees find it hard to avoid paying income tax, because the law requires their employer to withhold tax from their pay and send it directly to the tax office. However, people who are not employees can avoid paying income tax, through the use of things such as family trusts, deferring income or making substantial superannuation contributions.
Generally, to reduce income tax people need to do one of two things: share their income with someone else or defer the time at which they can actually spend their income. If the person with whom they share their income lives in the same household (for example, a married couple) then the household income has not fallen even though the household’s tax liability has been reduced.
Consumption taxes are not vulnerable to this kind of thing. As long as somebody in the household spends the money, the government will collect the tax. In this way, many people argue that consumption taxes such as our GST are fairer than alternatives such as income tax.
From time to time, there is a clamour to increase the rate applied to Australia’s GST. Currently, the rate is 10% – perhaps reflecting the need for most Australians to be able to easily calculate how much tax is payable (hint: just take a zero of the end of the normal price and you’ve got the GST).
Other countries have much higher rates of consumption tax – often called a Value Added Tax or VAT. The rate in Hungary, for example, is 27%. Denmark, Norway and Sweden are not far behind with 25%. In the UK, the rate varies but can rise as high as 17.5%. But the winner by a long street is Bhutan, where the VAT is 50%.
Interestingly, according to the United Nations, countries that charge relatively high rates of VAT are also the happiest. In 2018, the UN released its World Happiness Report. Finland, with a VAT of 24% on most things (dropping to 10% for things like books) is officially the world’s happiest country. Norway and Denmark came second and third. Sweden came in ninth. Australia, believe it or not, was voted the world’s 10th happiest country – which is as good an argument as any to keep the GST at 10%.