The GST may be less regressive than commonly thought, depending on how people's income is measured, new research by the e61-UNSW Policy Research Partnership has found.
Goods and Services Tax (GST) is priced into many everyday purchases, from groceries and clothing to restaurant meals and household bills. That means any change to the tax can affect how much households have left to spend.
GST is often described as regressive, meaning it takes up a larger share of lower-income households' income than higher-income households' income. This is because higher-income households tend to save more of their income , while lower-income households generally spend more of what they earn.
New research from the e61 -UNSW Policy Research Partnership suggests the picture is more complicated. It found that households pay a broadly similar share of their spending in GST, regardless of how much they spend.
The research examined how conclusions about the GST change when household resources are measured through current income, longer-term income and spending. The findings are relevant to the ongoing debate about whether Australia should increase the GST rate or broaden the range of goods and services to which it applies.
Scientia Professor Richard Holden , Vice-Chancellor's Professor and Chief Societal Economist at UNSW Sydney and Senior Academic Fellow at the e61 Institute, said the research showed why the impact of tax changes needed to be assessed carefully.
"People often think about the GST as taking a larger share of the income of lower-income households, and that is what we see when we look at income in a single year," he said.
"Household income can fluctuate, and people make decisions about when to spend, save or draw on their resources. Looking at spending and longer-term income provides a more complete picture of how the GST affects households."
How the research measured the GST burden
The research used 2015-16 data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey to compare GST payments with household income and spending. It also used data from multiple HILDA survey years to examine households' income and spending over a longer period.
It examined disposable income, household spending and broader measures of wealth, as well as how these resources changed over a single year and over a longer period. This helped account for temporary changes in income, such as unemployment, study or parental leave, and the different ways people save and spend throughout their lives.
Prof. Holden said looking at income in a single year could provide an incomplete picture of a household's financial position.
"Someone may have a temporarily low income but continue to meet their expenses by drawing on savings or borrowing. Similarly, someone with a high income in a particular year may save much of it rather than spend it," he said.
"To understand how the GST affects households, it is important to look at both what people earn and what they spend, as well as how those resources change over time."
How income changes the picture
The research found that the GST looks regressive when compared with people's income, but broadly proportional when compared with their spending. Households pay around 7.3% of their total spending in GST, regardless of how much they spend.
The research also found that the gap between lower and higher-income households narrows when income is measured over several years rather than a single year.
Looking at a single year, people with lower incomes pay more GST relative to their income. Those in the lower-income group (10th percentile) pay GST equivalent to 7.2% of their income, compared with 4.1% for those in the higher-income group (90th percentile). In other words, GST takes up a larger share of the annual income of lower-income households.
That gap narrows when income is averaged over several years to account for changes in people's circumstances, such as studying, taking parental leave or moving between jobs. Under this measure, GST accounts for 6.5% of income at the 10th percentile and 4.2% at the 90th percentile.
"Someone between jobs or taking time out to study will usually maintain their spending by drawing on savings or borrowing, so the GST they pay looks large next to that year's income," said Matt Nolan, Research Manager at e61 and co-author of the research.
"Meanwhile, someone having a bumper year tends to save the extra, so their GST looks small. These life-cycle fluctuations make the GST appear more regressive in a given year. Measuring income over a longer period allows us to smooth them out."
The remaining difference largely reflects the fact that higher-income households save more over their lifetimes. Some of this money may eventually be spent by the household or passed on as an inheritance and spent by future generations, meaning GST may be paid later.
"Much of that unspent wealth would attract GST later, when it is eventually spent by those who inherit it," Dr Nolan said.
"As a result, any concern about the regressivity of GST payments reflects a view that inheritances should be taxed at higher rates than other income."
The research shows that the perceived fairness of the GST depends not only on how much people earn, but also on how their spending, saving and longer-term financial position are measured.
The research also suggests that increasing or broadening the GST could be progressive if the additional revenue were returned to households through payments or rebates.
Prof. Holden said the findings also had implications for how Australia structures its tax system.
"All economists know that value-added taxes are more efficient than income taxes. These results have major implications for the political ability to shift our tax mix in a more efficient direction which boosts productivity and incomes."
