It was reported today that the Business Council of Australia (BCA) had recommended an increase in the GST (a consumption tax) and a decrease in the corporate tax rate.

At the heart of the BCA submission is a belief that capital is increasingly mobile and so the Australian tax system must encourage it to stay in Australia.

Consumption on the other hand is less mobile and therefore imposing a larger proportion of the tax burden on it can be justified.

The effect of an increased GST should be an increased savings rate as people choose to consume less and save more to avoid the consumption tax.

The BCA claims that decreasing the corporate tax rate from 30% to 20% would increase per capita GDP by 1.8% annually. The argument is a variation on the Laffer curve idea that was explored in an earlier EconArticles post and is far from unanimously supported by economists http://econarticles.com/node/17

One of the difficulties when constructing a tax system is that everything is connected. Provide a tax break on housing and excess cash will flow there; provide a tax break on businesses and suddenly the number of start-ups will increase. Often these connections are not clear until after the change is implemented.

Treasurer Swan was quick to pour cold water on any chance of the GST being raised but it'll be interesting to see what the Henry Review comes up with.

Further Reading:
Ross Gittins provides an interesting background to the Henry Review: http://business.smh.com.au/business/big-business-and-the-light-on-the-hi...

Glenn Milne’s article on Henry Ergas’ secret tax review for the Coalition is available: http://www.theaustralian.news.com.au/story/0,25197,25565696-33435,00.html

Dr Greg Mankiw and others have an interesting article 'Optimal Taxation in Theory': http://gregmankiw.blogspot.com/2009/06/optimal-taxation-in-theory-and-pr... and there is a related though easier to read article available here: http://www.voxeu.org/index.php?q=node/3651