If the talk at your next barbecue turns to tax reform, it’s a fair bet that the goods and services tax (GST) will get a mention. Why does tax reform changes GST heat BBQ conversations?
Proposed GST changes, either to its structure or its scope, is a topic that has been getting more oxygen than usual lately, especially combined with the government’s white paper on tax reform, which is looming on the horizon (to which Taxpayers Australia has had input).
One term that may get bandied about regarding the GST is that it is a “regressive” or “flat” tax. But what do these terms mean compared to its counterpart “progressive” taxes? As far as tax reform goes, one of the questions around the barbecue is how do regressive and progressive taxes affect the individual taxpayer.
A simple definition (cue Wikipedia) of a regressive tax is “a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases”. The “regressive” nature of it is that the tax can impose a greater burden on less wealthy taxpayers, making an inverse relationship between the tax rate and the taxpayer’s ability to pay it.
Therefore a consumption tax, which is typically viewed as a flat or regressive tax, in its theoretical form means poorer taxpayers have to dig deeper (as a proportion of their income) for goods and services than wealthier taxpayers. These expenses are largely unavoidable whether you are a multimillionaire or on minimum wage. Wealthier taxpayers will generally pay more consumption tax overall.
However, Australia’s GST system has written into it several exemptions (fresh food, health services, and other deemed “essentials”) that works to reduce the impost for those with less disposable income but who still need to pay for such essentials.
According to Andy Nguyen, tax technical manager at Taxpayers Australia: “Australia’s GST system attempts to be fair to lower income taxpayers by providing exemptions for food, health and education. The downside of this however is that it creates additional complexity. For example, trying to work out whether certain fresh food is GST-free can be tricky for tax professionals.”
On the other hand, a progressive tax would typically see the average tax rate increase as the amount subject to tax increases. The term refers to the way the rate increases and is imposed to ensure that the tax is less likely to be levied on taxpayers with a reduced ability to pay it, but more upon people with more resources.
An example would be our marginal personal income tax brackets, which have rates that climb progressively as the level of personal income increases. The theory at work is that people on lower incomes pay less tax in percentage terms than those on higher incomes.
A flaw with the progressive personal tax rates has to do with those “brackets”. Currently, these brackets are (before Medicare) zero to $18,200, no tax; up to $37,000, 19%; then to $80,000, 32.5%; to $180,000, 37%; and over that, 47%.
The issue of course is “bracket creep”. The steady rise of the CPI, which drags salaries with it, means that many Australians will be finding themselves edging over the line between one bracket and into the next, with the inevitable result of being subject to a higher tax rate.
“As part of the tax white paper process, the government has observed that there is much strain placed on individual taxpayers because of bracket creep. In fact, it makes up about 70% of the total tax take,” says Nguyen.
“This is why the GST is being looked at by the current government as a possible approach to re-addressing that balance. At the end of the day, the Australian tax system needs to be fair, simple and efficient. This is why the debate is so heated.”
So bookmark this page, and when you’re standing around the next barbecue and the discussion turns to tax reform and people start spouting those terms “regressive” or “progressive”, you’ll know where to look for some clarification.