The Goods and Services Tax (GST) is a regressive tax. On average, households in the lowest income decile pay over 12 per cent of their disposable income on GST or about three times the proportion paid by those in the highest income decile.
The value of GST concessions represents around 4 per cent of the disposable incomes of households in the lowest income decile or about four times the proportion received by those in the highest income decile.
In absolute terms, the amount of GST paid increases in line with household income, from around $40 per week for the lowest income decile to over $140 per week for the highest income decile.
Similarly, in absolute terms, GST concessions provide substantially greater benefits to higher income households. The value of the GST concessions to households in the highest income decile is about $32 per week or around two and a half times that for households in the lowest income decile.
Proponents of GST reform typically argue that the GST is a more economically efficient way of raising revenue than most other taxes. On the other hand, there are concerns that the GST is a regressive tax and compensation put in place to protect lower income earners from an increase in the GST could be eroded over time.
The compensation arrangements for transfer payment recipients on the introduction of the GST largely remain in place, although the impact of personal tax reductions has been eroded over time by bracket creep, with the average personal tax rate projected to return to its pre GST level by 2018–19.
A number of GST reform scenarios have been canvassed in public policy discussions that would either increase the rate of the GST or remove concessions from the GST base, or some combination of both.
This report presents analysis of the revenue and distributional impacts of five indicative GST reform scenarios, namely:
- include basic food in the GST base
- include basic food, health and medical care, education, child care and water and sewerage in the GST base
- increase the GST rate from 10 to 15 per cent
- GST rate 15 per cent and include basic food in the GST base
- GST rate 15 per cent and include basic food, health and medical care, education, child care and water and sewerage in the GST base.
Each scenario includes a compensation package that, in aggregate, would be sufficient to fully offset the impact of the changes on the bottom 40 per cent of households by disposable income. The specific design of compensation packages is a policy question, involving a range of possible changes to the tax and transfer systems about which the PBO has made no assumptions.
These scenarios would increase GST revenue, net of compensation, by between $4.8 billion (extending GST to basic food) and $49.3 billion (15 per cent rate, remove concessions from GST base) annually (Table 1). The ongoing impact of each scenario would grow broadly in line with nominal Gross Domestic Product (GDP).
Table 1: Summary of net GST revenue impact of scenarios
The analysis in this report makes no assumptions as to how any net additional GST revenue would be utilised, or the nature and extent of any possible associated changes to the tax and transfer systems.
The report is intended to help inform public debate on this issue through objective analysis. Consistent with the PBO’s non-partisan mandate, the report contains no policy recommendations.
Download the full report above.