Australia's Future Tax System

Final Report: Detailed Analysis

Chapter D: Taxing consumption

D1. A cash flow tax

D1–3 A sustainable tax base

The long-term sustainability and simplicity of an efficient consumption tax depends on its design and structure. The tax needs to be robust to short-term pressures to make changes to pursue other policy objectives. To be sustainable, a comprehensive broad-based tax should remain simple over time.

The current GST system achieves stability of the tax base by requiring unanimous agreement between the Australian government and the States before any changes can be made to the base or rate of GST. However, while this administrative arrangement has been effective in protecting the GST tax base, it makes it difficult to make improvements to the GST, as any government has an effective veto.

A direct subtraction method tax would not require the same institutional arrangement as a GST. Because net cash flows, rather than individual goods and services, would be taxed, there would be no need for the GST's system of invoices to enforce different tax treatments for different goods or services. The direct subtraction method would allow specific entities — such as very small businesses — to be removed from the system entirely, without making the system more complicated for those entities that remain (given that the tax makes no distinction between cash flows to or from 'registered' or 'unregistered' entities).

Finding

A destination-based cash flow tax, calculated on a direct subtraction basis, could be an efficient, simple and sustainable method of taxing domestic consumption.