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In the financial year 2022-23, the Australian Taxation Office (ATO) gathered a substantial $81.7 billion in Goods and Services Tax (GST), with projections in the recent federal budget indicating this figure is expected to rise to $94.1 billion in the current financial year. By 2026-27, it’s anticipated to approach the $100 billion mark.
Though the GST is designed as a straightforward 10 percent levy on goods and services, a myriad of exemptions complicates the picture. These exemptions mean that some Australians end up contributing almost 50 percent more in GST compared to others with similar spending patterns.
These disparities were highlighted in a report released earlier this week by the e61-UNSW Policy Research Partnership. The report delves into the inequities embedded in the current GST framework.
“Approximately half of all items are subject to GST,” explained Dr. Matt Nolan, a co-author of the study. “Our research uncovers that these exemptions are leading to significant disparities. Households with comparable spending or income levels can end up paying vastly different amounts of tax.”
“Our research finds these exemptions are causing a significant inequity where households which spend or earn similar amounts overall end up paying hugely different amounts of tax.”
According to the report, the amount of GST paid by low-spending households, who spend an average of $15,222 a year, ranges from $729 to $1354 – a difference of 46 per cent.
For an average household with about $37,500 in yearly expenses, there’s a 37 per cent difference between the lowest and highest GST bills.
That figure eases again to 33 per cent for the highest-spending households, although in dollar terms that represents a difference of more than $2500 a year.
This is a clear example of “horizontal inequity”, Nolan and fellow co-author Josh Clyne wrote, which brought about two clear issues in the tax system.
“As a fairness principle, horizontal inequity is bad as it involves making households contribute different amounts of tax when they have the same means to pay,” the authors wrote.
“In terms of efficiency, taxing different consumption choices differently encourages people to change their decisions about what to consume solely due to taxation – leading households and firms to organise themselves in inefficient ways to avoid the tax (i.e. supermarkets no longer offering warm cooked chickens to focus on the untaxed cold cooked chicken substitute).”
A wide range of goods and services are currently exempt from GST, including fresh food, private health insurance, childcare, sunscreen, and charitable donations.
Nolan said a select few are the main culprits driving the inequity.
“For households with low spending or income, the main cause of the divergence is the type of food they buy,” he said.
“While for high-spending and high-income households, exemptions for education and child care play a larger role.”
Consumption taxes are seen to do relatively little economic damage, and compared to other nations’, the GST is relatively low, at 10 per cent compared to the OECD average of 19.4.
Under the proposal, every adult would receive a $3300 “basics rebate”, effectively providing a $22,000 GST-free threshold to ensure low-income households weren’t left worse off.
Similarly, Nolan and Clyne called for all exemptions to be removed and to provide an annual rebate of around $900 to all adults, while keeping the rate set at 10 per cent.
They said the measure would be budget-neutral and remove the unfairness of the current system.
“In this scenario, people who earn and spend less are made better off, while those who are higher earners and spenders end up contributing additional tax,” Clyne said.
“This is just one example of how GST could be redesigned so it no longer depends on what people buy.
“The exact form of compensation is up for debate, but it’s clear we can reduce these horizontal inequities without punishing the most vulnerable.”