Advantages and Disadvantages of a GST
As the above overview demonstrates the advantages and disadvantages of a GST have long been discussed in Australia. An outline of what some consider the advantages and disadvantages of a GST will therefore suffice.
Advantages
- Allows considerable revenue to be raised. Cedric Sandford, Emeritus Professor at the University of Bath states a VAT's 'wide base means that a small rise in the tax rate generates considerable income.'(40)
- Adds to the stability of the Government's revenue base. For example, if an employee loses his or her job, he or she stops paying taxes. However that same employee must still spend (savings or borrowings) in order to continue to live and hence the employee continues to pay tax.(41)
- Reduces tax evasion and avoidance. For example, the GST requires a substantial audit trail.
- Reduces the size of the 'black economy'. For example, more enterprises need to be registered to obtain the benefit of a refund or credit of the GST already paid by them.
- A GST is fairer than the wholesale sales tax, and
- Increases the competitiveness of Australia's export industries.
Sandford concludes that a 'VAT is the most efficient form of general consumption tax. Whilst it undoubtedly has disadvantages, notably high compliance costs and regressiveness, these can be minimised by appropriate policy measures.(42)
Disadvantages
- A broad based single rate GST is regressive. Neil Brooks, Professor of Law, Osgoode Hall Law School, Toronto, also notes that 'increasing consumption taxes has the perverse effect of increasing the taxes that people pay at the stages in their lives when they can least afford to pay, namely, when they are likely consuming most of their income as opposed to saving it.' Therefore, Professor Brooks continues people pay more tax when they are establishing their families and when they are retired.(43)
- Short term inflationary pressures
- Experience overseas suggests that once introduced the GST rate tends to rise
- High compliance and administrative costs, particularly for small business. Damien Walsh, National Practice Leader, Indirect Taxes, Arthur Andersen, notes that a GST 'has very high compliance costs and those costs are borne exclusively by the business community (and ultimately passed on to consumers).'(44) Walsh cites as an example the production and sale of a loaf of bread from grower to ultimate consumer, and observes:
[E]ven though the entire amount of GST that the government ultimately receives is paid in a single transaction between the consumer and the supermarket, the farmer, the transport company, the bread baker will all have to introduce systems to track and claim input credits and to pay output tax notwithstanding that, at the end of the day, they have contributed absolutely nothing to the revenue.(45)
Neil Brooks concludes:
The advantages of such a tax (a GST)-the economic efficiency gains and the effect on international competitiveness-would appear to be dubious or trivial at best. By contrast, the adverse macroeconomic implications, the deadweight loss such a tax imposes on the economy in the form of administrative and compliance costs, the potential to increase the size of the underground economy, and most importantly, its effects in redistributing the payment of taxes from the rich to the middle-class and the poor have been well documented.(46)
copied from
http://www.aph.gov.au/library/pubs/bd/1998-99/99bd097.htm
