Should We Charge the GST on Exports?

Exporters often seem to be able to pay less tax than other businesses.  One of the key reasons for this is that exporters pay no GST on their exports despite benefiting from government expenditure on things things like education and various forms of assistance to industry including assistance that is specific to export industries.

This post asks whether it is about time to start charging the GST on at least some exports.

Details:

In a previous post it was suggested that we should get rid of the company tax and make up for the lost revenue by increasing the GST.   Among other things,  getting rid of company tax would eliminate the considerable company tax administration costs without increasing the cost of administering the GST.  It was also suggested in this post that further simplifications could be made by removing some of the current exceptions to the GST including the rules that allow exporters to avoid paying the GST.

Forcing exporters to pay the GST is not essential to the proposal to get rid of company tax.  However, for some odd reason some exporters were strongly opposed to the idea of paying the GST on exports.  However, allowing exporters to avoid paying the GST is significantly reducing government revenue and distorting the economy by disadvantaging businesses that compete against imports.  For this reason I have moved the exporter GST issue to this post.

In addition to not having to pay the GST on exports some exporters minimize corporate taxes by using strategies that are not available to non-exporters such as selling the export at a low price to a subsidiary in a low taxing country.

The arguments in favour of putting the GST on exporters include:

  1. The GST is a difficult tax to avoid.
  2. Too many exporters are able to minimize Australian taxes by managing their affairs so  their “profits” are made in some country other than Australia.  It is much harder for companies competing against imported goods and services to do so.
  3. Charging the GST on exports will reduce the value of the $Aus.  Reducing the value of the $Aus will make it easier for companies producing goods and services in Australia to compete in both Australian and overseas markets.  (The mining export boom drove up the value of the $Aus to the point where Australian manufacturing was damaged.)
  4. If raising the GST allows the company tax to be abolished it doesn’t seem unfair that exporters pay enough GST to pay for the reduction in company tax.

The arguments against include:

  1. Some exporting companies will struggle to compete despite the effect on the $Aus.
  2. The GST is a regressive tax just like the company tax and most government charges.

Charging at least some GST on exports should be seriously considered either on its own or as part of a plan to eliminate the company tax.

34 thoughts on “Should We Charge the GST on Exports?”

  1. Sellers aren’t charged GST, purchasers are, sellers just collect it and give it to Government.

    Regardless, it wouldn’t matter how much tax they raise, they’ll spend it all and then some.

  2. John, I know that the Australian dollar will adjust downwards, but exporters will lobby that a GST will make them less competitive. We don’t seem to have politicians with the bravery to make substantial changes any more.

    I’ve added “taxation” and “Economics” as tags to both posts. With a bit of luck we’ll get access to tags again, apart from the sample in the RH column.

  3. The threat of applying GST on exports might frighten some crooks (disguised as businessmen) into grabbing less loot from those of us who have to pay tax.

    The worrying thing in all this is that in having an even lower AUD exchange rate, we will be subsidizing overseas buyers even more – in addition to paying for our own conquest-by-chequebook as more Australian productive assets go into foreign ownership at giveaway prices.

    Far more revenue would be raised than through a GST on exports if our glorious government started deregistering companies that are committing tax fraud through complex financial arrangements

  4. GB: I have an open mind on what taxes should be eliminated and what should be done to replace lost revenue but I do think we should be considering taxes like the company tax that are costly to administer and vulnerable to rorting. I don’t think that the country is benefiting from giving exporters a free run.
    In terms of regressive I think what counts is the extent to which whether the overall tax/government charges/welfare system is progressive.

  5. John Davidson, 9.34pm on the 17th.

    Good point about the costs of collecting different taxes.

    I recall the hours and days of quarterly form-filling-in for BAS when my wife was consulting on a very small scale.

    That was a cost in her time. Did the ATO pay her? No, and in small businesses there must be relatively high compliance costs.

    That minor BAS experience made our annual income tax return completion look like a doddle.

    And then there are the costs incurred by the ATO…….

  6. Ambiguous: In terms of collection costs, these costs will change little in absolute terms if the rate of an existing tax is increased and there is no change in the rules. That is part of the reason why I support raising the GST.
    The easiest way to reduce collection costs is to cut out a tax completely.

  7. Bilb: The logical way for companies to pay for the help they get from the actions of past and present governments is to either pay directly for for specific services and/or make general payments like the GST or payroll tax that are broadly related to the services received.
    I can see no justification for giving exporters and multinationals a better deal.
    Having said all that change needs to be done over time to minimize disruption and give the currency time to adjust to the new tax regime.

  8. JohnD, the GST is properly set the way that it is. The tax thresh hold at $18000 preserves a degree of progressiveness in the tax system.

    As I concluded above the company tax is a good vehicle to have companies contribute to the government costs of services to them, and eliminating the franking credits prevents those costs being passed on directly to shareholders.

    GST on exports is not a good idea at all. It is in effect a reverse tariff which would only benefit importers. There are many ways to minimise the impact of such a mechanism and we saw some of those manipulations embarked upon by some minerals companies to avoid paying a super profits tax. It is a simple technique, the company creates an intermediary company in an offshore location and exports the product at cost from the jurisdiction they want to disadvantage and then invoice the end user from the intermediary “wholesaling” country.

  9. All taxes are a disincentive on the activity they are applied to, that’s not even slightly controversial.
    Taxing production is crazy if we want economic growth that rises the tide for every boat ( the big boats rise in a similar proportion to the small boats on average )

    Taxing consumption is better in my view because spending and saving are both good in their own way.

  10. Bilb: You say in connection with the GST that

    The tax thresh hold at $18000 preserves a degree of progressiveness in the tax system.

    Are you referring to the GST or something else?
    A GST on exports will, if anything drive the value of the currency down. This benefits Australian producers who are competing against imports.

  11. Jumpy, I see you picked up on Pence’s dumb trickle down remark in Indonesia. People on low incomes must spend every cent they earn, where the Turnbulls of the world only spend a portion of their income, the rest is in investments and off shore tax havens. Not a level playing field.

    JohnD, you can forget your taxing exports idea. Paying GST on all of the iron ore and coal leaving the country? Never going to happen.

  12. Jumpy, I see you picked up on Pence’s dumb trickle down remark in Indonesia.

    I haven’t heard the remark you refer to Bilb, but if it matches what I said then obviously I agree with him on it.

  13. Is there an episode in this series to do with reducing spending ?
    Revenue intake is trending upward but it’s never enough if spending is more.

  14. Jumpy: The economy depends on spending to work.
    Your business depends on people spending.
    Are you trying to kill your business? Or economy is slowing down because wages aren’t growing.
    Bilb: So far the big mining companies have been able to bully governments into allowing them to pay little tax. An export GST is one way of making it hard to avoid paying their share of tax.

  15. Or economy is slowing down because wages aren’t growing.

    In my industry wages are growing. ( second bottom graph )
    Note also stagnate employment and selling prices despite input costs and wages rising.
    This is wage growth over almost 50 years, show me surges in wage growth that boosted the economy.
    I can find little connection between the two leave alone evidence of this Keynesian demand side theory.

  16. Jumpy, Jumpy, ..Jumpy.

    The proof of the link of wages growth to economic growth is in the simple logic of your own falacious argument,…”a rising tide lifts all boats”. Whereas it is true that a rising tide will lift all boats that have no holes in them, the falacy in using this as the basis for an economic system is purely in the timing. A tide lifts all boats at the same time and at the same rate. If you could make that happen in an economy then that might make the trickle down approach more tolerable.

    There are two voices in this argument. The Conservatives say let us be super rich and when we spend our money “everyone benefits” ie is lifted by the tide of our benevelence. The problem with that is that rich people get rich largely by not spending money, and/or spending it very slowly, and when they do spend it they generally prefer to spend it abroad.

    The peoples voice says “let us earn a decent living and everyone will benefit”. Now that statement is absolutely true. Money that average families earn gets fully spent in the period between pay packets, creating a broad tide upon which every boat floats uniformally, and the tidal period is just one week. The big flashy boats float a little lower on the rising tide but a little higher on the falling tide (profit collection delay), a minor inconvenience.

    The other reason why you will not find an exact correlation between wages and economic lift is largely due (amongst many other things) to your very industry, construction in an inflated market. Every new building that releases money into the economy in a surge, but the repayment of that funding suppresses spending from those buyers for the next 25 years. These ripples/surges are not in harmoney with wage increases, so aligning wage growth with economic activity directly is impossible.

    Here endeth the lesson.

  17. I don’t want to enter the main argument, but just mention one happening.

    Henry Ford’s capitalist mates thought he was nuts when he paid his workers more than the going market price. Henry’s vision was that all his production-line workers would drive a Ford car to work.

    The rest is history, and it would be hard to argue that the economy didn’t benefit.

  18. ….and I should have added that the fact that Mike Pence would use the “rising tide” line in a speech to the Indonesian people demonstrates just how out of touch the Trump mob are and why the 45th presidency will be an unmittigated disaster.

    Some might recall my saying that if Trump on his first day in the White House..Mar Alargo increased the basic wage nationally from $7.50 to $12.50 then he would have a fighting chance at making the US greatish again. Didn’t happen, ….hang on to your hat, and if you are over 18 and under 30 consider emigrating to non nuclear New Zealand.

  19. Brian, Henry Ford ?
    How about we look through the Detroit tax system at that time together, here if you want.
    Then we can discuss if it would be workable today.

  20. …aaaand…as Brian said, it was Henry Ford’s combination of income sufficient to ensure people could enjoy a reasonable life style coupled with prodution line and automation that made America great in the first place. It was a bit miserable up till then despite having taxtion below 15%.

    By contrast we now have, only too vividly seared into people’s memories, the outcome of a commercial greed driven “profit at all costs” economy which delivered the GFC.

    http://www.econedlink.org/lesson/692/Henry-Ford-Model-T-Case-Study-Productivity-(Part-3)

    http://visualizingeconomics.com/blog/2011/04/14/top-marginal-tax-rates-1916-2010

    Missing from this second graph are exports imports and government debt which, if included, would clear up most misconceptions.

  21. Ford hated Unions and embraced automation of manufacture reducing employee/production ratio.
    Big on sales franchisees and commissions too.

    But how much did Ford export, to where and what tariffs did he face ?

  22. Ford hated Unions and embraced automation of manufacture reducing employee/production ratio.

    And his capitalist mates thought he was nuts when he paid his workers more than the going market price. Henry’s vision was that all his production-line workers would drive a Ford car to work.

  23. I pay my employees more than the ” market rate ” ( as you somehow assumes there is one that’s dictated by a bureaucrat ), why ?.
    Because I want better production and those that meet that standard get it, those that exceed that get more, those that fail go elsewhere.
    What, Henry Ford never sacked anyone ?

  24. Back at 2.36pm, BilB advocated raising the U.S. minimum wage, not the “market rate”.

    Many nations have a minimum wage. Why would that be? To assure no “child labour” exploitation, to assure no adult labour exploitation?? You see, humans learn from the past; our social institutions attempt to set standards below which we don’t wish to descend.

    Doesn’t suit?
    Find a desert island and see if you can con workers into following you there. No bureaucrats, no courts, no public servants. What could possibly go wrong?

    Cheerio.

  25. We found that when we were in the US in 2007 that things cost about the same in $US there as it did in $Aus here. Also at that time the US min hourly wage was less than half the Aus figure and the US had no equivalent of medicare. My son pointed out that some of the people living under canvas in the parks in San Francisco would have been people on full employment. Lots of beggars and places in the city like the Tenderloin that were considered unsafe for people like us to go.
    I don’t want to live in a second world country like the US, a country that it second world because it doesn’t have the minimum wages and welfare needed to provide a reasonable safety net.

  26. I pay my employees more than the ” market rate ”…

    Thereby answering your question at 3:59 pm, April 23.
    It is workable today.

  27. Thanks John

    for pointing out the practicalities and consequences of very low wages.

    The other folk who have a little protection because there’s a minimum wage rate (hourly rate) are the casually and part-time employed.

    More and more of them here.
    Every bit of protection helps.

  28. The conversation says that modelling shows how many billions in revenue the government is missing out on.

    The federal government could collect billions more in royalties and tax revenue if it changed the rules on debt loading and adopted alternative royalty schemes in dealing with oil and gas giants, new modelling shows.

    Our modelling, funded by lobby group GetUp, found that over the four-year period from 2012 to 2015, Chevron’s average effective interest rate was 6.4%. However, it has been steadily reducing from 7.8% in 2012 to 5.7% in 2015.

    We estimated that if Australia adopted a similar approach to Hong Kong to eliminate debt loading abuse, United States oil and gas giant Chevron would have been denied A$6.27 billion in interest deductions, potentially increasing tax revenues by A$1.89 billion over the four-year period (2012-2015)…..AND..Our report also includes an analysis of the potential for additional revenue from replacing the Petroleum Resource Rent Tax (PRRT) with resource rent systems used in the US and Canada. Oil and gas sales have increased from an average of A$5.96 billion per year between 1988 and 1991, to an annual average of A$33.3 billion between 2012 and 2015, indicating the huge growth in this sector.

    We modelled what would happen if the US and the Alberta, Canada, royalty schemes were applied to Australian production volumes and realised prices, to compare returns to those achieved by the PRRT.

    The US royalty scheme charges a flat percentage royalty on production volumes, priced at the well-head. The royalty rate was progressively increased in the US from 12.5% to 18.75% between 2006 and 2008.
    Based on the data from Australian production volumes and realised sales prices, the US royalty scheme could have potentially raised an additional A$5.9 billion in revenue for Australia since 1988, or A$212 million per year.

    Giving exports a free pass with respect to the GST is not the only way of getting exporters to pay a fairer share of our tax.

  29. Glencore’s Macarthur River mine paid $0 Royalties for 2015. We shouldn’t be mining our non-renewable resources unless the country is paid reasonable royalties.
    In addition:

    In 2006, a leaked Treasury document indicated that while the mine had not returned any royalties to the Government since it opened in 1995, it also had a 20-year agreement to receive a $5 million-a-year subsidy from the Government towards its electricity costs.

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