A recent OECD report has reopened the debate on increasing Australia’s GST. The report set forward arguments urging the government to increase the GST to as much as 18 per cent.

One of those arguments was that falls in government revenue are best made up by higher consumption taxes. As it stands now, Australia has one of the lowest levels of these indirect taxes in the world – 7 per cent as compared to a global average of 12 per cent.

Indirect taxes are payable through consumption. They take the form of GST, excise, duty, and tobacco, alcohol and gambling taxes.

And it’s true Australia has a lot of wriggle-room when it comes to increasing such revenue raising. New Zealand and Israel add between 15 and 18 per cent to the price of items. VAT (value-added tax) in the UK is 20 per cent. While Denmark and Sweden impose a whopping 25 per cent consumption tax on goods and services.

The OECD report encouraged Australia to broaden its GST base to include fresh food, medical costs and certain educational expenses.

“Broadening the GST base by reducing the number of zero rates and exemptions would make sound economic sense. The total effect of GST zero rates and exemptions for 2013/14 (financial year) in these categories is estimated at around $20 billion in foregone revenue.

“Theory and evidence suggest indirect taxes are preferable to direct taxes when considering economic growth, as they favour saving and investment and have smaller impact on business costs and profits as well as work incentives compared with other major tax bases, notably corporate-income tax and personal income tax.”

Reserve Bank governor Glenn Stevens has called for a debate on the issue. Increasing the GST is a politically sensitive issue, as voters don’t want to pay more for the same goods they buy every day. But government shortfalls in revenue need to be found from somewhere.

Finance Minister Mathias Cormann has dismissed any increases to the GST in this term of government.

Counterarguments point out that consumption taxes hit the less well-off harder, as we all consume more or less the same amount of basic goods and services. Any blanket increases then will eat up a larger proportion of smaller budgets.

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