Door to GST on health should be kept shut

hockey_chartered_accountants

Federal Treasurer Joe Hockey’s latest speech about reforming the personal income tax system has been subject to a lot of discussion.

Much of the discussion was perhaps not as flattering as the Treasurer might like, in part because we’ve heard the promises of tax cuts all before (by the way, did you read Sinclair Davidson’s excellent takedown of the Hockey speech? Itʼs a must‑read).

But what largely went unnoticed was the question and answer session after Hockeyʼs speech, in which he left open the possibility of broadening the GST base to health care:

There’s no doubt that with the exemptions in place in relation to the GST, the GST’s pace is narrowed, particularly with the growth in the healthcare sector, which is essentially GST free. And because health is growing with the ageing population, it means that the tax base for the GST is narrow.

But there are two sound reasons we should apply a strong, indeed prohibitive, health warning against extending GST to health care.

First, applying GST to health would entrench the unfair economic and financial advantages enjoyed by the public health sector against private sector operators.

As noted by economist Henry Ergas, ‘public hospitals do not charge fees … That means GST could not be applied to those providers. But it could be applied to their private competitors … As a result, extending the GST would make private providers less attractive, while reinforcing the public sector suppliers.’

As a consequence, imposing a GST would most likely swell public hospital waiting lists and reduce private health insurance memberships, harming the efficiency and effectiveness of our health system more generally.

Second, applying GST to health is likely to violate a basic principle of tax economics that taxation shouldn’t be imposed on investments which expand our productive capacity (for a similar application to school education, see a recent paper I wrote for Independent Schools Queensland).

Many economists argue there is a strong investment element in health care, with services maintaining the health of the workforce and helping to sustain labour productivity.

Sure, there is an element of consumption to health spending as well but taxing authorities are unlikely to have the knowledge or insight to be able to tease out which elements of health expenditures are for consumption or investment purposes, unless they were prepared to invoke exorbitant compliance costs and painful tax injustices trying to do so.

Is a cardiac procedure for a senior Australian consumption or investment, against the background of more older people being more willing and able to work these days? Is cosmetic surgery in all cases necessarily an act of consumption expenditure? What about vaccinations? These are actually not straightforward questions to answer.

When considering the diverse operating environment for Australian health care, and the contribution of health toward productive economic outcomes, Treasurer Hockey should, in fact, maintain a disposition against extending GST to health care.

facebooktwitter

, ,