The Progressivee Goods and Services Tax (GST) (Fiscal Policy) as a Tool of Inflation Targeting?

Abstract

This paper is divided into two parts: - Parts I and II. Part I of this paper addresses whether a valid analogy can be drawn between ‘Business Activity Statements’ as evident in the Australian Goods and Services Tax system (GST) and ‘VAT/GST tax returns’ (as a developing concept) effectively making the value added tax (VAT) systems across the approximately 145 countries throughout the World that have a VAT including that of Australia a progressive rather than a regressive taxation system with significant ‘tax and macroeconomic’ benefits to the countries that adopt such a system. This would effectively be achieved by extending the concept of a GST tax invoice as an analogy to a VAT/GST tax return for individuals and/or families. By developing such an analogy it is hypothesised that by multiplying the GST tax invoice - with a GST rate of 10% (as evident here in Australia) - by 0%, 10%, 20%, 30%, 40%, 50% and even maybe 60% or on the basis of any other numerical figure, logic and the Suits Index that the once thought of regressive VAT/GST throughout the 145 countries would thus become progressive in nature. The VAT/GST tax return would allow for the individual and/or the family situation and thus apply progressive rates in terms of ability to pay (premised upon assessable income or taxable income) to that tax base (expenditure) thus achieving progressivity in the indirect taxation system. The paper will also look at (generally) the following tax policy issues in assessing the progressive VAT: 1. Fairness or Equity 2. Simplicity 3. Efficiency/Neutrality 4. Suitability for Achieving Macro-Level Objectives A viable solution to the regressive-progressive VAT/GST debate both here in Australia and abroad? Part II of the paper however will also propose a cost of living allowance tax credit or rebate (both expenditure and savings based) funded through the progressive VAT/GST potentially allowing for the overcoming of the costs, consequences and effects of inflation. This part of the paper will also extend the purchasing power of the dollar price index (salaries and wages) and will thus prove through a simple mathematical representation as to how the expenditure based cost of living allowance tax credit can allow for the maintenance of the purchasing power of income (ie, salaries and wages) as an initial illustrative example of the macroeconomic benefits that may potentially be achieved through the cost of living allowance expenditure based tax credit or rebate. This part of the paper will also attempt a resolution to the Fisher equation. The Fisher equation relates interest rates to inflation. The paper will by proposing a cost of living allowance tax credit (savings based) also funded through the progressive VAT/GST may allow for a solution to the Fisher equation. Thus through a simple mathematical representation I will attempt to prove the above. A viable solution to the costs, consequences and effects of inflation?