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Quiggin, J. (1998), 'Tax reform is a multi-faceted quandary', Australian Farm Journal August, 11.
The Australian tax debate is, for better or worse, a debate about the desirability or otherwise of a Goods and Services Tax (GST), or what is called in most countries a Value-Added Tax (VAT). What is a GST/VAT and what does it mean for farmers ? A move to a GST/VAT involves both a change in the way in which taxes are collected and the range of goods and services which are taxed.
The change in the way taxes are collected is reflected in the term 'Value Added Tax'. Current indirect taxes, such as wholesale sales tax are levied at a single point in the marketing chain. By contrast, under a VAT, tax is levied at every stage of the marketing chain, but producers can claim back the tax paid on inputs to production. This means that a given producer pays tax only on the value they add to the product. No tax is payable when goods are exported, but it is still possible to claim back the tax paid on inputs. This means that, if exchange rates are unchanged, farmers who sell on export markets will be better off than under the wholesale sales tax mechanism. Unfortunately, it is likely that much or all of this benefit will be wiped out by an appreciation of the currency following the introduction of a VAT. Nevertheless, there is widespread agreement among economists that the value-added tax mechanism is superior to the existing single-stage tax.
The name 'Goods and Services Tax' captures another important aspect of the switch, that tax is applied to services as well as to goods. Since an increasingly large share of consumer expenditure goes to services rather than goods, it is only sensible that they should be included in the tax base.
The GST debate has also raised proposals for some logically unrelated changes in policy. The NFF has proposed removal of the existing tax exemption for food and has also suggested that existing fuel taxes should be abolished and replaced by a road user charge.
Removal of the tax exemption for food would be bad for Australia, and particularly bad for farmers. As producers of food, farmers would obviously be hurt by the imposition of a new tax. More importantly, because a food tax is highly regressive, low-income earners, including many farmers, would be made worse off. Expenditure on food, excluding restaurant meals, is equal to about 35 per cent of pre-tax income for the poorest 20 per cent of households and to only 7 per cent of income for the richest 20 per cent, so a food tax bears five times as heavily on the poor as on the rich.
In principle, a road user charge would be desirable. However, the idea that this would involve a reduction in taxes is a mistake. When the costs of accidents, pollution and land used for roads are taken into account, urban road users are not overtaxed. In fact, the community subsidizes urban road use by $7-10 billion per year. The NFF proposal would greatly increase this subsidy. It would be far better to argue for a higher rate of tax to be applied to urban fuel use, with some of the proceeds being used to reduce excessive taxes on rural users.
Professor John Quiggin is an ARC Senior Research Fellow based at James Cook University. Previous articles can be read at http://ecocomm.anu.edu.au/quiggin:JQ.html/
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