Whose reform? Which equality?
by John Nevile
Zadok Perspectives Issue No. 61
Winter 1998

Direct versus indirect tax

Direct taxes, and personal income tax in particular, lean much less heavily on the poor than do indirect taxes. Unless those who are designing the tax laws are very careful, a shift from direct to indirect taxes will increase the amount of taxes that the poor have to pay. Does that mean that Christians should oppose a goods and services tax (GST)? Not necessarily. It depends on how the GST is constructed.

In my opinion Christians should oppose a GST which includes a tax on food. The churches were certainly on the right track when they persuaded John Hewson to leave food outside the scope of his GST. Indeed, this is a widely recognised principle. Practically all the developed countries have a GST (Australia and the United States are the notable exceptions) but, with the exception of New Zealand, countries with a GST do not tax food or, more precisely, there is a tax rate of zero on food. It is also desirable not to levy a GST on rent, at least when people sign a contract for more than, say, a month. (There is no reason why there should not be a GST on hotel rooms.) Also, it is better if there is no GST on health expenditure, at least as defined in the current income tax act for purposes of the medical expenses rebate.

However, the introduction of a suitably structured GST which replaces much or all of the present wholesale sales taxes is not necessarily against Christian principles and might well improve the tax system from both an ethical and economic point of view. Such a GST must have a rate of no more than 10 per cent. If the rate of the GST is noticeably higher, with the GST paying for a significant cut in income tax rates, the situation is different. A shift from direct to indirect taxes will almost certainly end up with the poor paying more taxes, but could to some extent still be justified if all the reduction in income tax rates took the form of raising the tax free threshold, or the first part of one's income on which no income tax is paid. At the moment this is $5,400 and there is a rate of 20 cents in the dollar on income between $5,400 and $20,700. Anyone trying to live on $7,000 or $8,000 a year has every right to be regarded as poor and from a Christian perspective should be exempt from paying any income tax.

Increasing, indirect taxes to reduce the rate of income tax on incomes above $20,000 a year will almost inevitably increase taxation on the poor and should be opposed by Christians. At the moment the poorest 20 per cent of Australian households pay over 20 per cent of their gross income (including social security transfers) in indirect taxes. A shift to higher rates of indirect taxes will mean that they will pay more. While increases in the threshold will have some impact on the amount of income tax paid by those liable to pay income tax. it will not have a big effect on most of the poorest 20 per cent of households.

To: The structure of direct taxation

John Nevile John Nevile is Emeritus Professor, School of Economics, University of New South Wales.