Using a higher GST to pay for income tax cuts is a ‘recipe for more inequality': new report
Thursday 5, November 2015
The Australian Council of Social Service today released new modelling from the National Centre for Social and Economic Modelling (NATSEM) to show what an increase in the GST to 15% would mean for households across the community. The NATSEM modelling also shows what it would mean if the Federal Government used the revenue from an increase in the GST to fund a reduction in personal income taxes across different income groups.
The NATSEM modelling, commissioned by ACOSS with support from the Carnegie Foundation, confirms that using an increase in the GST to fund income tax cuts will mean households on low and modest incomes are significantly worse off and higher income households are the winners, paying less tax overall as a proportion of their income.
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A higher GST?
“The NATSEM modelling of an increase to 15% on the existing base of the GST or a broadening of the GST base to fresh food, health and education confirms that either change would be regressive. Low and modest income households would clearly pay a higher proportion of their income, in comparison to higher income households through an increase in the GST, whether by increasing the rate or broadening the base by removing the exemptions,” said ACOSS CEO, Dr Cassandra Goldie.
Ben Phillips of NATSEM said, “An increase in the GST has a much bigger impact on low and modest income households because they spend more of their overall income to meet their living costs, in comparison to people on higher incomes who are better able to save. An increase in the rate of the GST to 15% would require people in the lowest 20% of the income brackets to pay 7% more, people in the middle 20% 4.2% more, and people in the highest 20% income bracket just 3% more of their income.”
Mr Phillips said, “A broadening of the base of the GST to fresh food, health, water and education would also be regressive, with people on lower incomes paying proportionately more of their incomes on these essentials. The relative impacts are clear: 4.6% of income for people in the lowest income brackets, 2.7% for people in the middle, and just 1.7% for the highest income earners.
A higher GST to fund income tax cuts?
“NATSEM has also modelled the impact of raising the GST to 15% to pay for a cut of 5% in all personal income tax rates to demonstrate how this would change who pays what proportion of tax, in reference to their incomes. The results are stark: two thirds of households, on incomes up to about $100 000 would be worse off and the top 40% would gain at the expense of the bottom 60%. The lowest 20% of households by income would lose $33 a week (6.6% of income) on average while the top 20% would gain an average of $69 a week (2.1% of income),” Mr Phillips said.
Dr Goldie said, “Increasing the GST to fund income tax cuts is a also a big, complicated revenue ‘churn’ that would do nothing to ease the pressure on State health, education and welfare budgets, particularly as it would clearly require a major compensation package to ameliorate its impacts on people who are hit the hardest. If it’s not about raising more revenue, the Government has to justify why this option is being considered at all.”
“Raising the GST to fund cuts to personal income tax across the board, as some advocate, is a recipe for more inequality, not a stronger economy,” said ACOSS CEO Dr Cassandra Goldie.
A better approach to tax reform?
“ACOSS is a strong supporter of comprehensive tax reform to improve economic efficiency to support jobs growth, to increase simplicity and fairness, and to secure a more sustainable revenue base for essential services and infrastructure. We agree with business and the unions that tax reform should remove tax concessions that are no longer fit for purpose, shift away from clearly inefficient tax bases such as stamp duties towards efficient bases such as land taxes, and remove distortions in the tax treatment of investment incomes. This was clear common ground from the National Reform Summit Group, and consensus between the Business Council of Australia and ACOSS.
“We welcome the Federal Government’s preparedness to put changes to superannuation tax concessions, negative gearing and capital gains and other tax concessions and loopholes, such a discretionary trusts and other tax shelters, back on the table.
“However, if the Federal Government’s main game for tax reform is to shift the responsibility for paying taxes away from personal incomes towards consumption, it would fail on all grounds. Fairness and simplicity would be undermined and it would do little or nothing to improve economic efficiency. It would be a recipe for driving inequality. The Government’s own Tax Reform Discussion Paper highlighted that the most inefficient taxes are stamp duties and other business and transaction taxes, not personal income tax. This is where the serious effort to shift taxes should be focussed.
“ACOSS does not rule out any increase in the GST. However, an increase in the GST should not be our starting point, when low and modest incomes earners carry the greatest risk.
“There is no doubt that governments will need more revenue to continue to provide the health, education and welfare services the community expects. ACOSS supports efforts to reform the tax system to do this in the fairest and most efficient way. This research confirms our view that increasing the GST should be one of the last options considered to raise revenue for those services, when low and modest incomes earners will carry the greatest risk.
Key Findings:
Increasing the GST:
Increasing the GST to pay for income tax cuts:
Thursday 5, November 2015
The Australian Council of Social Service today released new modelling from the National Centre for Social and Economic Modelling (NATSEM) to show what an increase in the GST to 15% would mean for households across the community. The NATSEM modelling also shows what it would mean if the Federal Government used the revenue from an increase in the GST to fund a reduction in personal income taxes across different income groups.
The NATSEM modelling, commissioned by ACOSS with support from the Carnegie Foundation, confirms that using an increase in the GST to fund income tax cuts will mean households on low and modest incomes are significantly worse off and higher income households are the winners, paying less tax overall as a proportion of their income.
DOWNLOAD Report
A higher GST?
“The NATSEM modelling of an increase to 15% on the existing base of the GST or a broadening of the GST base to fresh food, health and education confirms that either change would be regressive. Low and modest income households would clearly pay a higher proportion of their income, in comparison to higher income households through an increase in the GST, whether by increasing the rate or broadening the base by removing the exemptions,” said ACOSS CEO, Dr Cassandra Goldie.
Ben Phillips of NATSEM said, “An increase in the GST has a much bigger impact on low and modest income households because they spend more of their overall income to meet their living costs, in comparison to people on higher incomes who are better able to save. An increase in the rate of the GST to 15% would require people in the lowest 20% of the income brackets to pay 7% more, people in the middle 20% 4.2% more, and people in the highest 20% income bracket just 3% more of their income.”
Mr Phillips said, “A broadening of the base of the GST to fresh food, health, water and education would also be regressive, with people on lower incomes paying proportionately more of their incomes on these essentials. The relative impacts are clear: 4.6% of income for people in the lowest income brackets, 2.7% for people in the middle, and just 1.7% for the highest income earners.
A higher GST to fund income tax cuts?
“NATSEM has also modelled the impact of raising the GST to 15% to pay for a cut of 5% in all personal income tax rates to demonstrate how this would change who pays what proportion of tax, in reference to their incomes. The results are stark: two thirds of households, on incomes up to about $100 000 would be worse off and the top 40% would gain at the expense of the bottom 60%. The lowest 20% of households by income would lose $33 a week (6.6% of income) on average while the top 20% would gain an average of $69 a week (2.1% of income),” Mr Phillips said.
Dr Goldie said, “Increasing the GST to fund income tax cuts is a also a big, complicated revenue ‘churn’ that would do nothing to ease the pressure on State health, education and welfare budgets, particularly as it would clearly require a major compensation package to ameliorate its impacts on people who are hit the hardest. If it’s not about raising more revenue, the Government has to justify why this option is being considered at all.”
“Raising the GST to fund cuts to personal income tax across the board, as some advocate, is a recipe for more inequality, not a stronger economy,” said ACOSS CEO Dr Cassandra Goldie.
A better approach to tax reform?
“ACOSS is a strong supporter of comprehensive tax reform to improve economic efficiency to support jobs growth, to increase simplicity and fairness, and to secure a more sustainable revenue base for essential services and infrastructure. We agree with business and the unions that tax reform should remove tax concessions that are no longer fit for purpose, shift away from clearly inefficient tax bases such as stamp duties towards efficient bases such as land taxes, and remove distortions in the tax treatment of investment incomes. This was clear common ground from the National Reform Summit Group, and consensus between the Business Council of Australia and ACOSS.
“We welcome the Federal Government’s preparedness to put changes to superannuation tax concessions, negative gearing and capital gains and other tax concessions and loopholes, such a discretionary trusts and other tax shelters, back on the table.
“However, if the Federal Government’s main game for tax reform is to shift the responsibility for paying taxes away from personal incomes towards consumption, it would fail on all grounds. Fairness and simplicity would be undermined and it would do little or nothing to improve economic efficiency. It would be a recipe for driving inequality. The Government’s own Tax Reform Discussion Paper highlighted that the most inefficient taxes are stamp duties and other business and transaction taxes, not personal income tax. This is where the serious effort to shift taxes should be focussed.
“ACOSS does not rule out any increase in the GST. However, an increase in the GST should not be our starting point, when low and modest incomes earners carry the greatest risk.
“There is no doubt that governments will need more revenue to continue to provide the health, education and welfare services the community expects. ACOSS supports efforts to reform the tax system to do this in the fairest and most efficient way. This research confirms our view that increasing the GST should be one of the last options considered to raise revenue for those services, when low and modest incomes earners will carry the greatest risk.
Key Findings:
Increasing the GST:
- Raising the GST to 15% without removing exemptions would raise $29 billion in 2016, increase the CPI by 2.8%, and reduce the spending power of the lowest 20% by 7%, the middle 20% by 4.2%, and the top 20% by 3%.
- Removing the exemption for fresh food and leaving the GST rate at 10% would raise $7 billion, increase the CPI by 0.7%, and reduce the spending power of the lowest 20% by 2%, the middle 20% by 1%, and the top 20% by 0.6%.
- Removing the exemption for health and community services and leaving the GST rate at 10% would raise $6 billion, increase the CPI by 0.6%, and reduce the spending power of the lowest 20% by 1.6%, the middle 20% by 0.8%, and the top 20% by 0.6%.
- Removing the exemption for education and leaving the GST rate at 10% would raise $5 billion, increase the CPI by 0.4%, and reduce the spending power of all household income groups by a uniform 0.6%.
- Removing the exemption for water and sewerage and leaving the GST rate at 10% would raise $1 billion, increase the CPI by 0.1%, and reduce the spending power of the lowest 20% by 0.4%, the middle 20% by 0.2%, and have a negligible impact on the top 20%.
Increasing the GST to pay for income tax cuts:
- Increasing the GST to 15% without removing exemptions and using all of the revenue to pay for a 5% cut in all marginal personal income tax rates would result in losses for most of the lowest 60% of households up to around $100,000 in household income to pay for gains for most of the highest 40%:
- 99% of the lowest 20% would lose an average of 6.7% of spending power, as any tax cuts would be offset by higher prices;
- 91% of the second 20% would lose an average of 3.3%
- 67% of the middle 20% would lose an average of 2.4%
- 64% of the fourth 20% would gain an average of 1.8%
- 75% of the top 20% would gain an average of 3.2%
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