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ABCDCPA AustraliaEconomic Analysis of the Impacts of Using GST to Reform TaxesSeptember 2011THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK© 2011 KPMG, an Australian partnership and a member firm of the KPMG network of independentmember firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.The KPMG logo and name are trademarks of KPMG.Liability limited by a scheme approved under Professional Standards Legislation.
CPA AustraliaEconomic Analysis of the Impacts of Using GST to Reform TaxesSeptember 2011Executive SummaryOn May 2 2010, the Australian Treasury released its comprehensive review into Australia’s tax andtransfer system, Australia’s Future Tax System: Report to the Treasurer, dubbed ‘the Henry TaxReview.’ The report documents the findings of a comprehensive review of the Australian taxationsystem, including modelling of the economic efficiency of taxes, which was undertaken by KPMGEcontech.Following this, the Australian Government will be holding a public Tax Forum in early October2011, which will consider directions for future tax reform in the context of the Henry Tax Review.The aim of the forum is to continue the tax reform discussion, and to hear the communityrepresentatives’ view on building the tax reform agenda.The Henry Tax Review recommended the abolition of various relatively inefficient state taxes suchas conveyancing duties and insurance levies. However, to maintain revenue for the government,other relatively more efficient taxes may need to be raised to fund the abolition of the inefficienttaxes. This has the potential to improve overall efficiency of the economy by reducing costs forbusinesses and households, and increasing overall productivity.One of the relatively efficient taxes in Australia is recognised to be the GST. Furthermore,Australia’s GST rate is amongst the lowest in all OECD countries, making it a potential candidate forreform. Thus, whilst there are challenges in re-designing the current GST framework, it isnevertheless important to include it in any discussions about tax reform.Hence, to inform debate around the potential role of the GST in the Australian tax environment(particularly ahead of the upcoming Tax Forum), the CPA Australia commissioned KPMG Econtechto undertake an objective economic study to inform discussion around the potential role of the GSTin the Australian tax environment. This report examines the economic impacts of increasing the GSTto fund a reduction in a number of more inefficient taxes. The four alternative scenarios examined inthis report are listed below.• 12.5% GST replacing less efficient taxes - increase GST rate to 12.5% to fund the abolition ofselected relatively inefficient taxes.• 15% GST replacing less efficient taxes - increase GST rate to 15% to fund the abolition ofselected relatively inefficient taxes.• 20% GST replacing less efficient taxes - increase GST rate to 20% to fund the abolition ofselected relatively inefficient taxes.• Uniform GST replacing less efficient taxes - extend the 10% GST to all goods and services(except those that are currently input-taxed) to fund the abolition of selected relatively inefficienttaxes.The inefficient taxes to be abolished are in the following order:1. Insurance Taxes – Insurance Duty and Fire Insurance Levy;2. Motor Vehicle Taxes – Stamp Duty and Motor Vehicle Registration;3. Commercial Conveyancing Duty; and4. Payroll Tax.Where there is still additional revenue remaining from the higher GST rate after abolishing theinefficient state taxes, the extra revenue is used fund other tax reductions and to address equityconcerns. Specifically, this additional revenue is used to reduce company income tax rate, the taxrate on the top bracket of personal income tax, and as a transfer payment to households.© 2011 KPMG, an Australian partnership and a member firm of the KPMG network of independentmember firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.The KPMG logo and name are trademarks of KPMG.Liability limited by a scheme approved under Professional Standards Legislation.i
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