LAST weekend, we were driving down the Geelong Road and came across an enormous yellow billboard. The message was that if you wanted to avoid paying the GST on fresh food and medicine, you had better vote Labor.
The fact that the Coalition has no proposal to levy the GST on either fresh food or medicine was clearly neither here nor there for the brainiacs running Labor's local campaign.
Where are those pesky fact-checkers when you need them?
What is it about Labor and the GST? Back in the 1980s, the Labor government was about to press the button to introduce a consumption tax.
Prime minister Bob Hawke changed his mind at the last moment, thereby double-crossing his treasurer, Paul Keating.
Ironically, Keating as prime minister used the prospect of a GST as an electoral weapon to defeat Liberal leader John Hewson in the 1993 election. This was notwithstanding the fact that Keating knew a consumption tax was both desirable and inevitable for Australia.
After John Howard's government introduced the GST, Labor continued to wage war against it. Two election campaigns were effectively wasted by the Labor Party arguing for a rollback of the GST. Among the front-row haters of the GST is Kevin Rudd. In 1999, when the GST legislation was passed, Rudd declared: "When the history of this parliament, this nation and this century is written, 30 June, 1999, will be recorded as a day of fundamental injustice - an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians.
"It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up."
Now there's a bit of hyperbowl.
Rudd's sermon also prompts the question: why didn't the Labor government rescind the GST while in office and thereby restore the social compact that, in Rudd's opinion, was so heartlessly torn up?
"Steady on" would be the likely response. The GST brings in about $50 billion annually. By 2016-17, the proceeds are projected to be close to $60bn.
The government can't simply get rid of this useful source of revenue. Quite.
The real challenge, according to Kevin, is how to prevent the GST ever being applied to a jar of Vegemite.
But let's go through the facts. The 10 per cent GST levied in Australia is relatively low by international standards. A number of exemptions apply, including to fresh food, education and health. Exemptions are not uncommon overseas, although ours are more extensive than most.
When the GST was introduced in 2000, income tax scales were adjusted, welfare payments were increased and a number of distorting taxes, levied by the commonwealth and state governments, were eliminated.
The most important tax to go was the wholesale sales tax.
Initially, GST revenue grew strongly as consumer spending was fuelled by rapid credit growth. In more recent years, the rate of growth of GST receipts has slipped noticeably, with growth in spending on the exempt items significantly outstripping growth in spending on GST-liable goods and services.
And here's an important point: middle and high-income earners spend a higher proportion of their incomes on GST-exempt items than low-income earners.
In other words, the exemptions - and this includes fresh food - are in effect regressive, in the sense that they favour the better-off.
So while Kevin might care to hold on to that jar of Vegemite for political purposes, the equity of the GST would be improved were fresh food to be covered. Moreover, the removal of this exemption would lower the compliance costs for those selling foodstuffs.
The debate about the GST, the proceeds of which are directed to the states and territories, is also bound up with the issue of federal financial relations and the application of horizontal fiscal equalisation. In simple terms, struggling states such as Tasmania and South Australia receive more GST revenue than would be justified on the basis of their populations, and the others receive less.
The Labor government commissioned a review of the distribution of the GST, chaired by former NSW premier Nick Greiner. It recommended a number of changes, although the application of a strict per-capita funding model was rejected.
The government has let the report gather dust.
While the Henry review on a future tax system, also commissioned by the Labor government, was prevented from considering the issue of the GST directly, one of the most significant tables in that report gave the game away.
The estimated economic losses (the "excess burden") of the GST was 8c in the dollar compared with 24c in the dollar for personal income tax and 40c in the dollar for company tax.
In other words, if the government wants to raise $100 million, say, it is much less costly to do so by raising the revenue through the GST than through personal income tax or company tax. There was a very strong message in the Henry review for the government, which it chose to ignore.
So what are the real objections to changing the GST? For Labor, it really seems to be a case of heart over head, fiction over fact. Given Labor's ambitious spending plans, you would think they would be falling over themselves to embrace higher taxes.
And the most obvious adjustment - which involves the least economic distortion, along with land tax - is to increase the rate of the GST. The only practical alternative is to rely to an even greater extent on personal income tax, which currently accounts for 47.9 per cent of all commonwealth tax receipts.
On the government's own projections, this percentage will rise to 50.3 per cent by 2016-17, or nearly 12 per cent of GDP.
More and more people will be pushed into higher tax brackets - unattractively called fiscal drag by economists. This will generate increasingly adverse incentives for people, particularly secondary breadwinners, to participate in the workforce or extend their working hours.
This is the real point: there are no free lunches out there, although there are some cheaper ones.
With the need to repair the budget and pay back the accumulated debt, there is a very strong case for changing the tax mix to impose lower economic costs on the tax dollars raised.
Even if the overall tax burden is unchanged, it makes more sense to have a greater reliance on consumption tax and a reduced reliance on personal income and company tax. And if a decision is taken to increase the overall tax burden, this rule is even more important to apply lest the size of the economic pie is reduced in relative terms.
Were the GST to be increased, compensation could be directed to those on low incomes, mirroring what was done when the GST was initially introduced. This addresses the equity concern.
Refusing even to contemplate an increase in the rate of the GST or a change to the current exemptions is just dumb policy.
