Raise Top Tax Rates, Not the GST

Abstract

This paper argues that increasing the GST, by raising the rate above 10 per cent while retaining the current tax base, or by broadening the base to include all forms of consumption expenditure, does not offer a solution to the widely perceived problems of the Australian tax system. The direct, regressive effects of such GST changes are well understood. We argue here that when we also take into account the effects of the measures, generally accepted as a corollary of the policy, that are required to compensate low income households, not only will the regressive distributional effects be exacerbated, but serious losses of economic efficiency will also result. Our analysis supports the proposition that raising tax rates across top incomes would be a far more equitable and less distortionary reform than raising the GST.