Fact: 26 OECD countries have a value added tax (VAT, which is the same as GST). In fact, until South Korea joined in 1996, Australia and the United States were the only OECD countries that did not.
Only in France has the VAT fallen since it was first imposed. Back in 1968, it was 20%. Today it's "just" 18.6%. The French must all be sighing with relief.
Just about everywhere you look, the VAT/GST is a tax that only goes one way: up.
VAT rates
then and now
5 OECD countries with a 10% "introductory" rate
| Country/year VAT imposed | Rate then | Rate now |
| Denmark, 1967 | 10.0% | 25.0% |
| Germany, 1968 | 10.0% | 15.0% |
| Mexico,1960 | 10.0% | 10.0% |
| New Zealand, 1986 | 10.0% | 12.5% |
| United Kingdom, 1973 | 10.0% | 17.5% |
| AVERAGE | 10.0% | 16.0% |
As the table shows, 5 OECD countries -- Denmark, Germany, Mexico, New Zealand, and the United Kingdom -- imposed a value added tax at the same "introductory" 10% rate Howard proposes for us. Only in Mexico is the rate still 10%.
The overall average rate for these five countries today: 16%. That's where you can expect Australia's GST to be in 10 or so year's time.
Politicians and bureaucrats love GST -- because it's "efficient." But they don't use the word "efficient" the same way you and I do. They mean: it's easy to collect and almost impossible to avoid.
GST is legally inescapable. Everything and everybody is taxed. With an income tax, you can take deductions, and you may pay no tax at all if your income is low.
But GST doesn't allow any deductions, even for the poorest taxpayer. Every time money changes hands, no matter how tiny the sum, it's taxed. If you make a loss you don't pay income tax...but you still pay GST.
As a result, GST allows politicians and bureaucrats to indulge in their favourite pastime: spending other peoples' money. In OECD countries with value added taxes, government spending has gone (on average) from 28.9% of GNP in the year before the tax was introduced to 41.8% of GNP now.
Okay, John Howard has included a neat trick in his GST proposal: the rate can only go up if all the State governments agree. There's just one wrinkle that seems to have escaped everyone's notice. That is, all the revenues from Howard's GST go to the States, not the Federal government. So state governments are about as likely to resist a hike in the GST as pensioners are to turn down an increase in their pension cheque.
Fact: In 1986 our neighbour across the Tasman, New Zealand, introduced a GST at the same 10% rate Howard is proposing for us. According to the IMF, in the following 10 years, the New Zealand economy expanded at the minuscule real rate (after inflation)of 0.68% per year.*
That's right: less than 1% per year.
Over the same period, with its supposedly creaky, anti-growth tax system, Australia's economy expanded 3.14% annually -- four times as fast.
Japan introduced a VAT in 1989 -- a mere 3%. Japan's economy has gone downhill ever since. Coincidence? Perhaps.
But whatever you tax, you get less of. Increase the tax on cars, and fewer cars are sold. Hike the tax on cigarettes, and some people quit smoking while others smoke less. Increase the tax on profits and, lo and behold, profits fall. Raise the income tax, and people work less overtime.
A GST is a value-added tax. Tax value added, and you get less value added. Since "value added" is the very engine of economic growth, when a country introduces a GST or VAT, its rate of economic growth goes downhill.
A GST is also a sales tax. Tax sales -- and sales drop. When sales drop across the board, so do profits, employment...and economic growth.
So it shouldn't surprise you to learn that over those same 10 years (1986 to 1996) Australia's economy grew faster than all the other OECD countries with value added taxes put together: 3.14% per year (after inflation) compared to 2.43%.
If those economists who predict that a GST will boost Australia's economic growth "in the long run" turn out to be right, it would be the first time in recorded history that a GST has increased a country's rate of economic growth.
Australia needs tax reform to be sure. But those 26 OECD countries with GSTs need tax reform even more desperately than we do.
Some businesses will clean up thanks to GST...
For the simple reason that they'll be better off. The biggest winners: the giant supermarket chains like Coles and Woolies.
A GST is normally paid to the government once a quarter. But goods and services are sold every day of the year. What happens to the tax money until the end of the quarter? It sits in the company's bank, earning interest.
Every cash business will benefit. But Coles and Woolies will be better off to the tune of around one billion dollars in extra cash flow per year.
No wonder they support it.
When New Zealand introduced GST, a lot of small businesses went bust. Some were no good at cash flow management: they spent the money instead of hanging onto it till tax-time. Others were sunk by the negative cash flow effects of GST or the drop in sales.
All small businesses, no matter how profitable, were hurt just by the unrewarded effort of dealing with the complex regulations and bookkeeping requirements that a GST entails.
Worse, however, is the effect a GST has on new businesses. A company just starting up has to pay 10% more for everything it buys. But it doesn't get a refund of the GST it's paid until it starts collecting GST.
For a lot of companies -- especially those innovative, Silicon Valley-type start-ups -- it can be years before they start to make a profit and collect more GST than they pay out.
Some innovative Australians won't be able to afford to start a new business. Others will...in Silicon Valley, USA.
Howard claims his new tax system will help create more jobs. Wrong again.
Fact: The first thing a GST does is sink marginal businesses. And as sales of everything drop, Coles and Woolies, to name just two of Australia's biggest employers, won't need so many people. Watch unemployment zoom.
And in a future with GST, the Australian economy will create fewer jobs than it does now, not the more Howard hopes.
Sounds like a recession. Things might not be quite that bad, but there's one similarity you can be sure of: If your salary goes up, it will go up less than it has over the past 10 years.
Unless Howard's promise to slash the income tax escapes joining his others in the dustbin of history, your income tax bill will drop. So you'll pay more tax overall -- on a salary lower than it would have been without GST.
Even if he keeps this promise, you'll have to give him back most of what you saved on income tax every time you visit the supermarket.
So there seems to be just one thing you can be certain of:
So pledged George Bush in 1987, when he accepted the Republican nomination for President.
Two years later he hiked income taxes -- and was thrown out of office at the next election.
Seems like promises in politics have a short shelf-life; perhaps they should be date-stamped like food in the supermarket...
So Howard's solemn pledge to you, made just two years ago on May 24th, 1996, bears repeating:
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Mark Tier is an Australian businessman and economist who has lived the last 21 years in Hong Kong where there's no VAT or GST -- and for that matter, not much in the way of taxes at all.
*All GNP figures and comparisons are after-inflation and in local currency. Source: the International Financial Statistics Yearbook, 1998 edition, published by the IMF, Washington, D.C.