An “extreme GST” model of 15% tax on 100% of goods and services has been mooted for Australia. Can changing the marginal rates in the top tax brackets achieve the same net revenue result as any change to the GST?
How to compensate those on low taxable incomes
Following we illustrate the complications of ensuring that those at the bottom rates are not worse off.
Here are our current tax brackets.
| Table 1: Australian income tax rates between 2018/19 and 2021/22 (residents) | ||
| Tax brackets | Rate | Tax payable on this income |
| $0 – $18,200 | 0% | Nil |
| $18,201 – $37,000 | 19% | 19c for each $1 over $18,200 |
| $37,001 – $90,000 | 32.5% | $3,572 plus 32.5% of amounts over $37,000 |
| $90,001 – $180,000 | 37% | $20,797 plus 37% of amounts over $90,000 |
| $180,001 and over | 45% | $54,097 plus 45% of amounts over $180,000 |
We can see that someone on $18,200 pays no income tax. However, they will require approximately an extra $1,800 after the average 10% GST change. How would they, or anyone below $18,200 be compensated given they pay no tax? How would they be tracked into the future? Make them start submitting a completed annual tax return in order to claim compensation?
We can show that someone on $34,000 pay would about $3,000 in tax. Their after-tax income would be around $31,800. The GST compensation required would be approximately $3,000. After being compensated by this amount, in the end they would pay close to zero tax.
Everyone below $34,000 would pay no tax and $34,000 would become the new tax free threshold: almost doubling from $18,200.
Under another set of – possibly more realistic – assumptions, the tax-free threshold might need to be as high as $37,670.
Someone currently with a $50,000 taxable income pays about $7,800 in tax. Compensation of 10% on their after-tax income would be about $4,000. After refunds they would have to pay $3,800 in tax, barely above the tax paid at the current $37,000 threshold.
Someone on $90,000 would need the marginal tax rate lowered to around 20% for them to be fully compensated.
Compensating all taxpayers below the new tax free threshold on a year after year basis in an equitable and fair way might not be possible. A whole new tracking system would be needed if they are not required to lodge a completed income tax return. Compensating those up to $90,000 would need a revision of the brackets and the marginal rates.
Those over $90,000 would not be compensated.
Table 2 indicates the number of individuals in each tax bracket.
*Note: Actual 2018-19 data are not yet available; the values are approximated using 2016-17 and 2017-18 data provided by the ATO to the author of this article.
| Table 2: Australia: Taxpayers and tax collected per tax bracket – 2018-19 (*Estimates only) | ||||
| Tax brackets | Number of
taxpayers |
Proportion of taxpayers | Total Tax
$ Millions |
Proportion of total tax |
| $0 – $18,200 | 2,700,000 | 18.6% | 200 | 0.1% |
| $18,201 – $37,000 | 3,100,000 | 21.4% | 5,100 | 2.2% |
| $37,001 – $90,000 | 6,250,000 | 43.1% | 73,200 | 31.8% |
| $90,001 – $180,000 | 1,900,000 | 13.1% | 79,000 | 34.3% |
| $180,001 and over | 550,000 | 3.8% | 72,500 | 31.5% |
| Total | 14,500,000 | 100.0% | 230,000 | 100.00% |
Under our assumption of compensating all those with taxable incomes up to $90,000, we can broadly predict that:
– Around 12 million taxpayers or 83% would pay the new full GST but be fully compensated.
– Around 2.5 million or 17% would pay the new full GST but would receive no compensation.
As indicated above, it may be necessary to increase the tax free threshold to $34,000 or even $38,000. As such we would end up with one of the more unusual personal income tax systems in the world. For comparison, in New Zealand, Canada and the USA the base threshold income is $1.00. That is, individuals pay marginal tax on the very first dollar earned, and thereafter.
A recent PwC report on the Australian GST wrote:
“Some compensation will occur automatically, in that welfare and transfer payments are indexed, but appropriate compensation of at least the bottom two income quintiles of households will require further mechanisms. These will be complicated to design, but must be confirmed and safeguarded before reform occurs to maintain community confidence in the equity of reforms.”
Their report does not provide any detail about how compensation would work.
From Table 2 we can guess that there could be around 6 million individuals in the first tax two brackets who would effectively pay zero income tax but who will somehow have to be tracked for compensation payments, as a minimum on a yearly basis, if not fortnightly or weekly.
However, if we are interested in the net amount of money raised from the full GST model (15% on 100%), say $21 billion, a relatively simple alternative is available:
- Those over $90,000 would not receive any compensation.
- Instead of charging them (and everyone else) 10% extra on their expenditure, it is easier to raise their marginal tax rates above $0.37 and $0.45.
- The ATO would determine the required marginal rates so that the income effect would be exactly the same as them paying 10% extra on average on their purchases due to the GST increase.
- This option should mean minimal disruption, if any at all, yet would raise the same amount of revenue.
- Thus, why would we want to change the GST?
A less ambitious option that may be considered is to only raise the GST on those items already taxed. Thus, the rate could go up from 10% to 15% on about 50% of expenditure. That would be an increase of approximately 2.5% in people’s cost of living. Assuming a similar compensation system, we can estimate that the tax free threshold would have to be raised to around $22,000 and marginal tax rates up to $90,000 would need to be adjusted downward. The major problem is that those individuals below $22,200 (perhaps up to 3.5 million) would need full compensation outside the tax system. Constructing a compensation system for them that is fair and lasts forever might be difficult.
But the same relatively simple alternative applies: instead of changing the GST, raise the marginal rates in the higher tax brackets to raise the equivalent revenue.
Why the proposal to increase the GST needs to be rethought
Under the full model (15% on 100%), Australians would find that consumer prices will increase on average by about 10%. This is a tripling of the average GST rate or a 200% increase. Where the Government used to collect $4,000 from a household’s purchases, they would now collect $12,000 from the same household.
Here we concentrate on the complexities of compensation under the full model (15% on 100%). Clearly we could reduce the impacts if we went for less than the full model (for example, 15% on 50%) and/or used lower hurdles for compensation.
Under any such change, the challenges would be to find a practicable, uncomplicated compensation system for low income earners that will be fair and doesn’t leave too many worse off and will work for many years.
Policy makers will have to decide if now is the time to change the GST: to raise any prices, in particular the prices of three significant expenditure items for Australian consumers – fresh food, health and education; to make compliance for businesses even more demanding with a partial GST change.
Would the personal income tax system and welfare system become too complex?
The calculations and numbers given in this article are simple ‘back of the envelope’ calculations aimed to illustrate the complications. Maybe they explain why there seems to be little interest in changing the GST from the Coalition or the ALP.
However, if proponents for some form of rise in the GST are in fact interested in the amount of revenue raised, there is the alternative of generating the same net tax revenue through raising the higher marginal tax rates.
That way the ALP won’t be able to accuse the Coalition of a “great big new tax on everything”.
Robin Boyle lectured in statistics at Deakin University and preceding institutes for three decades until 2009. His academic background in mathematics, economics and finance, as well as statistics, led him to developing teaching software in those areas and to be widely sought after as a textbook author.
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