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Tax talks 5: the effects of a higher GST on households
Increases in the Goods and Services Tax (GST) are being advocated to help fund services provided by the States such as health care; to replace other indirect taxes such as Stamp Duties or Payroll Taxes; or to pay for income or company tax cuts.
Many people are concerned about the impact of a higher GST on low and modest income households and the overall equity of the tax system. Advocates of a higher GST argue that this can be fixed with compensation. Yet if a tax reform requires a major compensation package, this is a sign that its fairness is in doubt. Compensation may not last, and too much reliance on it shifts the risk of reform to people who are least able to bear it. So we need to know the impact of GST changes before any compensation is offered.
To assess the equity impacts of changes to the GST, ACOSS commissioned the National Centre for Social and Economic Modelling (NATSEM), with support from the Carnegie Foundation, to model the impact of a number of scenarios involving an increase to the GST. ACOSS also commissioned NATSEM to model using revenue from an increase in the GST to fund personal income tax cuts, a direction for tax reform currently being debated.
The NATSEM Report models the following changes (among others) on different households[1]:
- An expansion in the ‘base’ of the GST to include fresh food; water; health and community services; and education;
- An increase in the GST rate off the existing ‘base’ from 10% to 15%;
- Using the revenue from an increase in the GST rate to 15% off the existing base to reduce all personal income tax rates by 5 percentage points. These across-the-board tax cuts are not designed to compensate for the increases in the GST, but instead to show the ‘pure’ impact of a change in the ‘tax mix’ from income to consumption, as some advocate.
[1] The NATSEM report, The distributional impact of the GST, provides more detailed results, and is available at the link below in related content. ACOSS appreciates the work of the authors, Ben Phillips and Matt Taylor, but views expressed here should not be attributed to them or to NATSEM.
