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Would Broadening the GST Necessarily be Regressive?

In his recent Sir Henry Parkes Commemorative Dinner speech the Prime Minister called for a review of Commonwealth/State financial relations in the context of either raising the States’ revenue base or passing some of their responsibilities to the Commonwealth.  Changing the Goods and Services Tax (GST) is one of the options being considered by a Commonwealth/State officials group considering this matter. A number of Coalition members and senators are taking public stances in support of changing current GST arrangements.

Collecting more GST involves increasing the GST from its current of 10 per cent rate and/or broadening the range of economic activities to which it applies. Currently, the GST does not apply to a number of areas, amongst which are some food items (mostly fresh), health and education.

The GST has been identified as a regressive tax by the Australian Council of Social Services (ACOSS). A tax is regressive when it takes a higher proportion of the income of those on low incomes, compared to those on higher incomes. A broad based consumption tax with no exceptions is regressive because it applies uniformly, and those on lower incomes spend a higher proportion of their income on goods and services than those on higher incomes.

Whether broadening the GST would be regressive depends on how much of these goods and services different income groups actually consume and how their consumption responds to an increase in price. The following table shows the percentage of income spent on two broad classes of GST exempt items, by broad income category, for the 2009-10 year:

Table 1: Percentage of average weekly dollar expenditure

Income quintile   Lowest Second Third Fourth Highest
 Health (per cent)  3.3  4.2  2.8  2.7 2.6 
 Education (per cent)  1.6  1.8  2.6  2.8  2.9

Source: ABS Cat 6530 (Equivalised disposable income)

These figures show that for health the percentage of income spent declines as the average income increases, but not for education. These figures suggest that if the GST was applied to the Australian education sector it would not produce a regressive outcome. Rather, those on high incomes spend a higher proportion of their income on education and so would pay a higher proportion in tax.

In relation to health spending, broadening the GST to this area would in isolation produce a regressive outcome. This impact might be reduced if some of the proceeds of this initiative were spent on improving lower income earners’ access to health services.

The Big Picture

When the GST was first introduced several areas, notably selected food items, health and education were not included in its reach. Certain food groups were exempt due to the impact that a price rise might have on lower income groups. Health and education were exempted at the time the GST was introduced, because their supply was made with a large amount of government assistance, and to levy the GST only on private providers would place those providers at a competitive disadvantage vis a vie their publically funded counterparts.  As the private sector has increased its role in the provision of these services this particular rational for exempting them from the GST becomes less persuasive.

Several economists have noted that exempting certain expenditure categories from a broad based GST is a very blunt way of meeting any equity goals. Rather they suggest that applying the GST more broadly, together with offsetting changes in targeted social security programs and progressive income tax rates would be a much more efficient way of doing things. This approach seems to have been been ruled out by the Treasurer.

Tags: taxation