Why a GST rise could lead to lower prices

I wrote late last year when the “GST rise” debate started that I thought it was a good thing for our indirect taxes to go up. I did put in the caveat that a drop in other taxes was necessary to make this a meaningful contribution to everybody in our economy. Not just a way to raise revenue for the government to spend.

Lower income taxes for individuals. Removal of state payroll taxes –  the single most ridiculous tax that is the key barrier to creating a new job. And lower corporation taxes to allow Australian companies to compete with multinationals that legally pay less tax to operate in the same market. Those taxes allow all companies access to the same social benefits for their employees, the same ASIC to keep things above board, the same ACCC to hear their complaints and access to a judicial system that is even-handed in dealing with business issues within Australia. This is all very different to operating in other countries around Asia.

For clarity these multinationals are not breaking Australian laws in paying less tax. It’s not an Australian issue. The government and public servants of Ireland are just doing a better job of competing for international tax dollars than any other government and public servants in the OECD.

It may sound unimportant, but an ‘even tax playing field’ for all companies operating in the same market is key to genuine competition, and export growth outside of that market. A lack of cash flow kills business. Two key things that take cash from equally well-run companies are interest charges and taxes on profits. If one company is paying about the same interest to access capital in the same market as its competitor, but one is paying considerably less tax in that market, there is unfair advantage. One can invest more in R&D, new product development, awareness for brands and growth in export markets than the other. Just common sense, there’s nothing Keynesian about this.

Back to lower prices. As GST has risen in most OECD countries, prices at shelf for shoppers have dropped. Government always gets its dollar, and has no need to seek productivity in its own business of governing unless forced to by the ballot box.

Productivity improvement in the shape of lower prices in stores falls to companies. Shoppers don’t get paid any more in compensation as GST (VAT, TVA, MwSt in all its different names) rises, so new ways to make, source, sell and deliver products to shoppers is the focus for retailing and manufacturing companies alike. And prices drop. Don’t believe me?

Go and shop in the UK where VAT had risen from its original 10% to 20% over time. Prices have been dropping for over a decade. Sure they spike up and down occasionally, but overall the cost of things big and small has dropped. And in Australia we have a huge amount of dropping left to do to catch up with this lower price cousin of ours.

Maybe a 15% GST will help our economy grow and lower prices. But a bit of a simpler and more supportive tax approach from government, not just central banking, wouldn’t go amiss.

Kevin Moore is a retail expert and the chairman of Crossmark Asia Pacific Holdings and Mirador Retail Technology. He is also the founder of TheRoadToRetail.