The Goods and Services Tax (GST) is a major feature of the tax system in Australia, raising approximately 14% of government revenue. Relative to other countries, Australia’s GST is narrow, with around half of spending untaxed, such as fresh fruit and vegetables, and education fees. This paper explores the horizontal equity consequences of these exclusions and discusses the winners and losers from expanding GST to tax all consumption items (broadening the base).

Horizontal equity reflects charging the same tax rates for households with the same ability to pay for taxation. When these effective tax rates differ, two households who spend the same amount every week pay different amounts in GST, solely due to the particular goods and services they purchase. 

Broadening the GST base would remove the horizontal inequity in the current system. To illustrate this the paper estimates a scenario where the GST is broadened to include all exempt categories, alongside an annual transfer to all Australian adults. This reform scenario would be budget-neutral and compensate households with fewer resources.

Key findings

• Effective tax rates differ for similar households: across all spending and income levels there are large differences in tax paid.
• Age and household structure do not explain this: there are large differences in tax rates between individuals of a similar age and with a similar household structure.
• Different exemptions matter for different people: the exclusion to food generates much of the variability among low-spending and low-income households, while exclusions to education and child care are more important for high-spending and high-income households.