Consumption taxes: How do we compare?

VATworldInsideThe recently issued government paper Re:think suggested a review of the goods and services tax (GST) system, including increasing the rate applied beyond the current 10% as well as the range of items it applies to.

While we all know that GST is levied at 10%, and that fresh food, health and educational products and services are generally exempt, perhaps less well known is that as a percentage of overall tax revenue in Australia, GST accounts for a mere 12.1%. The biggest proportion of tax revenue comes from personal income taxes, at 47.1%. Company tax makes up 22.6% of the overall tax take.

Our GST is just one form of consumption tax, with some nations labelling their own version value added tax (VAT). With tax reform again on the horizon, some comparisons with the consumption tax regimes operating in other countries may prove educational.

OECD member nations
A study conducted by the OECD in late 2014 on consumption tax trends found that while most OECD countries have increased their standard VAT rates, only a few have taken measures to broaden their VAT base. “Many OECD countries continue to use reduced VAT rates and exemptions mainly for equity and social objectives,” its report said.

“However, broadening the VAT base by limiting the use of reduced rates and exemptions may allow countries to increase revenue without raising the standard rate, and at the same time reduce compliance and administrative costs. A reduction of the standard rate may even be possible by broadening the tax base.”

The tax base (the goods and services to which the tax applies) varies considerably across different countries, with common exemptions mirroring Australia’s, namely most food, medicine and water supply. Lower rates rather than exemption, for food for example, are utilised by 17 OECD countries.

Some OECD member nation consumption tax regimes are summarised below.

New Zealand: Its standard GST rate is 15%, which is below the OECD average of 19.1% (up from 17.6% in 2009). In New Zealand no GST applies to a limited number of goods and services. In the last five years, 20 of the 34 OECD countries have raised their standard VAT/GST rate at least once. In line with this trend, New Zealand has increased its GST rate from 12.5% to 15% in 2010.

The OECD report found that NZ’s GST represents 30% of the country’s total tax revenue (based on 2012 data). The average for OECD member nations was 19.5%.

Britain: The British VAT rate has been on a yo-yo ride recently. While sitting at 20% at present, it was 17.5% up until January 2011, following a reduction from 17.5% to 15% in December 2008 and an increase from 15% back to 17.5% in January 2010. As a proportion of overall tax revenue, Britain’s VAT accounts for 20.8%.

Canada: The standard federal GST rate of 5% is one of the lowest in the OECD. Canada has not changed its standard federal GST rate since 2008, after having reduced it from 7% to 6% in 2006 and from 6% to 5% in 2008. Note however that a number of provinces may also levy their own consumption tax (such as the 8% sales tax in Ontario), much like the state and county taxes operating across the US. The percentage of Canada’s total tax take that its GST accounts for is 13.7%.

The USA: The only OECD country that employs a retail sales tax rather than a VAT as the principal consumption tax. However, the retail sales tax in the US is not a federal tax. Rather, it is a tax imposed at the state and local government levels. Currently, 45 of the 50 states impose general retail sales taxes as do thousands of local tax jurisdictions whose levies generally are identical to the state levies and are administered by the state.

Given that the OECD lumps retail sales taxes and consumption taxes such as VAT into the same category, it estimates that as a proportion of overall US tax, the taxes realised from “general consumption” accounts for 8% of total tax revenue, which is the lowest of OECD member nations.

Korea: Like Australia, the Korean VAT rate is 10%, and therefore well below the OECD average. It has zero tax on a range of goods and services, and has not changed its VAT rate since its introduction in 1977. Even so, Korea has managed to increase its tax take from consumption tax to a local record high of 17.2% of overall tax revenue.

Denmark: Frequently upheld as an example of a well thought out tax system, Denmark has a standard VAT rate of 25%, which is well above the OECD average of 19.1%. In contrast to the 20 OECD countries that have raised their standard VAT/GST rate at least once in the last five years, Denmark has not changed its standard VAT rate since 1992. Its VAT accounts for 20.6% of overall tax revenue.

Sweden: Another example of a tax system held in high regard by various commentators is Sweden. The Swedish standard VAT rate is also 25%. Reduced VAT rates of zero, 6% and 12% apply to a number of goods and services. Sweden has not changed its standard VAT rate since 1995. Sweden’s VAT accounts for 21.1% of its overall tax revenue.

Band of disparate jurisdictions
Within the European Union, individual countries can charge different value added taxes, and the VAT/GST rates vary between 17% and 27%, but averages out to about 21%. Many EU countries keep the tax rate lower for certain products like food items. Also, the tax rate is at a higher level in the northern European countries, given their extensive welfare states.

An interesting situation developed within the EU, where GST/VAT thresholds only apply from outside the EU, as the movement of goods within the EU is not subject to the collection of duty and taxes at the border. Therefore EU tax authorities have had to put in place an anti-avoidance measure which states that goods, upon entry into the EU, are to be taxed at the point of final destination (so that goods should not “land” in a cheaper GST/VAT country, and then trucked into another higher-taxed country — part of an EU-specific tax avoidance problem dubbed “carousel fraud”).

Complexity in construction: A lesson from Australia’s recent past
When the prototype GST was being prepared to be introduced here in the late 1990s, then Prime Minister John Howard agreed to exempt health, education and fresh food products from the new consumption tax in order to secure the legislation’s passage through Parliament. These exemptions were deemed necessary to smooth out the envisaged disadvantages that less well-off citizens would feel were an extra 10% tacked on to the costs of everyday essentials.

Food in particular became a thorny issue, and one that can still cause a lot of head scratching (see some of the issues the Tax Office has had to come to terms with on its web page that defines which foods are taxable and which not).

The curly conundrums of the pre-GST food discussions that took place in the lead up to its introduction can be illustrated in then leader of the Liberal party John Hewson’s notorious GST and birthday cake interview with Mike Willisee in 1993 (see the video below to re-live the moment).

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