A way to expand the GST and make it less regressive.

A fair way to broaden the GST, collect more revenue, and avoid increasing the burden of the less advantaged would be to extend it to education.

educ spending

Education spending shows more of an association with income than even alcohol, clothing, vehicles or holiday accommodation. 

Screen Shot 2014-10-06 at 1.09.29 pm
Screen Shot 2014-10-06 at 1.19.07 pm
vehicle purchase spend
Accommodation spend

Taxing education has the potential to make Australia’s GST fairer. Perceptions that it is unfair are a major impediment to reforming the GST.

The GST is regressive. (nb. I had to figure this out the old-fashioned way after being unable to find a single publication that contained this data.) Lower income households pay more of their (equivalised disposable household) income in GST than higher income households, according to my calculations.

GST current burden
Calculated using ABS 6530.0 Household Expenditure Survey, Australia: Detailed Expenditure Items, 2009-10; ATO GST rulings; 6523.0 Household Income and Income Distribution, Australia, 2009-10

Lowest income households pay 11.5 per cent of their income in GST (higher than 10 per cent because some spend more than they earn). Highest income households pay 8.7 per cent.

In absolute terms, this means the highest income households pay four times as much GST ($148/week) as the lowest income households ($36/week). They can do so because they have 5.5 times the disposable income ($1704 vs $314).

This is not quite as regressive a tax as I had assumed. The exemptions agreed by the Democrats and the Coalition in 1999 make a difference. Without exemptions, the GST would be even more regressive.GST share without exemptionsThe definition of a progressive tax is one where the rich pay more as a percentage of their income. Levying GST on education will not turn the GST into a progressive tax. But it moves it in the right direction.

Screen Shot 2015-04-09 at 3.32.33 pm
Those are percentage points on the vertical axis.

You can see the comparison a different way in this next graph.

Screen Shot 2015-04-09 at 3.32.46 pm

The estimated revenue gain of taxing primary, secondary and tertiary school fees would be around $1.2 billion.

Two caveats remain.

One is pure politics. Education is seen as A Good Thing. Even though Australia would continue to provide free and universal school education, a decision to tax education expenditure would cause confusion and dismay. I wrote just yesterday about how insufficiently distinguishing sin taxes and revenue taxes causes trouble, and this would fall right into that trap. This government would also face the problem that its supporter base are more inclined to be patrons of private education. (I should note here that I am not biased against private schools, having attended one myself.)

The second comes to the exact question of fairness that prompted my investigation into how GST could simultaneously be extended and made less regressive.

The association between education expenditure and household earnings is not simply a matter of wealthy people sending their children to private schools. The period of peak earnings in a person’s life is also commonly in their 40s – the period where they have children in secondary school. In other words, the statistics insistence that education spending is a luxury good could be more of a life-cycle artefact.

Nevertheless, the same is true of many types of expenditure, and an opportunity to plug a hole in the GST – and do so fairly – is rare enough to be worth grasping.

What would really happen if we gave more tax and spend power to the states?

I published this controversial piece a while ago: Four really awesome, quite left-wing ideas from the Commission of Audit.

I got a lot of thoughtful responses on the twitter.

The audit suggested giving ten percentage points of income taxation to the states to raise or lower as they pleased. I argued:

Putting more tax and spending power in the hands of a demonstrably more left-wing level of government will likely lead to more spending on – and better outcomes in – health and education.

ACTU economist Matt Cowgill wasn’t going to let that wash, and tweeted:

MattCowgillMay 02, 11:11am via Web

@jasemurphy I completely disagree that giving income tax powers to the states would be “left wing” or have progressive results.

A bunch of other comments followed.

This is what’s awesome about the information superhighway. You get to talk to super smart people who have done a lot of thinking, who compel you to think deeper and refine your views.

I concede my analysis was partial.

But today’s comments by Martin Parkinson, Treasury Secretary, have brought me back to this topic.

“the Budget flags that potentially significant changes in the distribution of responsibilities for schools and hospitals could arise from the forthcoming Federation and Tax White Papers.”

Is it a good idea to give more taxing and spending power to the states? Now I’ve thought more about it, I’m not going to die in a ditch for the idea. But I think it deserves to be considered, not dismissed out of hand.

Here’s a list of possible outcomes, arranged into pros and cons.


More tax and spend at state level

When I first wrote on this topic, nobody took issue with my point that letting states set taxes would lead to more tax and spend.

Just this week, My old boss Mat Dunckley published a piece about former premiers’ support for a higher GST. There’s mixed evidence, given Mr Napthine’s comments in the press about not raising the GST but it’s hard to imagine Labor state governments would not tax more – whether on income or goods and services – to spend more if they could.

If you believe publicly provided services are good, you may believe this would lift national living standards

Because Australia’s poor states are also small, I contend extra money for state schools in rich states would be more useful for the disadvantaged than extra money for state schools in poor states.

Sure, a smaller proportion of Victorians are very poor than Tasmanians. 15 per cent of Victorians rely on the government for 90 per cent of their income, compared to 21 per cent of Tasmanians.

But the absolute number of people in need in Victoria is seven times higher. (15 per cent of the population of Victoria is 750,000 people. 21 per cent of the population of Tasmania is 100,000 people.)

Keeping one’s focus trained on equalising between states may distract from equalising between people.

Self determination

Consider Europe. Would it really be a good idea to equalise funding between Sweden and Greece? You’d help Greece, but dim a beacon of quality in publicly-funded systems, and disenfranchise the people of Sweden.

I have in the past been accused of excessive parochialism, and I really do identify as a Victorian, but I think letting different states set different priorities can be good. Should not Victorians be able to set our taxing and spending policies without being compromised by Queenslanders?

Imagine if our federal government set health policy, but health funding came from ASEAN or the G20, along with a range of rules. Would that really be satisfactory?

More accountability for state governments.

State governments are a bit of a joke at the moment. A technocratic solution would be to kill them off and locate responsibility for everything with the federal government. Given that won’t happen, and we’re stuck paying state MPs salaries, can we not use them?

Politicians with big goals and deep skills play the game federally. Relatively little press attention is given to state governments. This is a shame because they have domain over much of what one thinks of as the role of government.

A system that really gave state governments power would simultaneously create an expectation for them to deliver.

More opportunity for innovation

State governments are bundled up inside the COAG system, and trussed with conditional grants. Their policy making freedom is curtailed, by decree of the level of government that holds the purse strings.

But smaller governments can excel. If this were not true, Malaysia would be a disaster compared to Vietnam, Switzerland a shambles compared to Germany.

Left alone to experiment, Australia’s states could model their education system on the Finnish system, the Korean system, a version of the Montessori method, or indeed become the next global model themselves. No doubt some would go backwards for a time, but neither is a the status quo an iron-clad defence against standards slipping.


Differences in outcomes between jurisdictions.

Matt Cowgill tweeted a link to a terrific story he wrote about the US school system. He uses the HBO show The Wire to demonstrate how a poor area can be left behind under a system where small jurisdictions each fund their own education system.

This is a powerful point. But Matt’s argument –  People of equal means and need should have same access to services regardless of state – sets a bar we do not currently clear.

Poor states go into suffering spiral.

The reason we have “horizontal fiscal equalisation” is that without it smaller, poorer states will tend to get further and further behind the rest. Lacking both economies of scale and a wealthy population, they face a tough choice between high taxes and good services, or low taxes and bad services. Both options will hurt living standards and the outcome gap between a Hobarter and a Sydney-sider will grow even wider.

Sorting effect

After a few years of differential tax and spend settings, a possible “sorting” effect could emerge.

People who want more services move to left wing states (e.g. Victoria) and people who want less tax move to right wing states (e.g. Queensland). This could polarise the whole nation, a la Americana.

I’m not going to try to tally the pros and cons column here. But I hope you feel, as I do, that this has been a useful exercise. Feel free to engage in another round of debate!