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Thursday, January 23, 2014:

Prices, labour taxes and consumption taxes

Letter submitted by Gavin R. Putland to the AFR on January 21, in reply to Greg Angelo

The myth that replacing PAYG income tax by GST would raise prices (Greg Angelo, AFR Letters, January 21) is based on the unwarranted assumption that the income currently withheld by employers as PAYG tax would be paid out in wages, so that the business income needed to pay the extra GST would need to come from elsewhere.

In contrast, I am proposing (AFR Letters, January 20) that the withheld PAYG tax be credited towards the GST bill, allowing a higher GST rate to be paid without additional business income, i.e. without higher prices.

Why is this an improvement on the status quo? Because a consumption tax, unlike a tax on labour, exempts exports and capital formation, allowing an untaxed expansion of employment for those purposes.

Moreover, a higher GST is not the only reform that can be compensated by a cut in labour taxes. For example, lower prices caused by lower labour costs for employers can compensate for the introduction of a broad-based land tax, which exempts not only the labour embedded in exports and new capital, but also the labour embedded in products for domestic consumption.

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