kpmg-econtech-final

ABCDCPA AustraliaEconomic Analysis of the Impacts of Using GST to Reform TaxesSeptember 2011Key FindingsImpact on Living StandardsChart 1 illustrates the impacts on living standards as a result of each scenario. Because the efficiencycosts of raising the GST are lower than the efficiency benefits of abolishing the inefficient taxes, allof the tax reforms lead to an overall higher level of living standards. The size of the impact dependson the size of increase in the GST, as well as the nature of the inefficient taxes abolished.It is important to note that the standard of living impacts presented here are aggregate measures.Specifically, individuals with a larger exposure to the abolished taxes will tend to enjoy higher livingstandards, whilst those who have a larger exposure to the GST will tend to either benefit less or benegatively impacted upon.Overall, it is estimated that aggregate living standards in the economy would be higher under each ofthe alternative tax reform scenarios.Chart 1Annual impacts on living standards (deviation from baseline, $billion) 154.74.644.0321.61012.5% GST + taxreform15% GST + taxreform20% GST + taxreformSource: KPMG Econtech, MM900 simulationsUniform GST +tax reformImpact on Industry ActivityThe variations in taxes that are abolished and in the design of the GST also lead to different impactson industry activities, as shown in Chart 2. In all scenarios, total GDP is higher than wouldotherwise be the case. This is because the abolition of inefficient taxes leads to higher multi-factorproductivity from improved allocative efficiency. Despite the increase in GST, which tends todiscourage activity and output, the efficiency effect on output dominates, leading to an overall higherlevel of GDP.Impacts at the industry level tend to be non-uniform. While most sectors experience higher activitylevels because of the tax reforms, sectors with larger exposures to the GST and/or smaller exposuresto the abolished taxes are expected to have reduced levels of output.For example, the Finance and Insurance industry is likely to experience large benefits from the taxreforms, as it would no longer be subject to insurance taxes. On the other hand, the Education andHealth industry is likely to be negatively impacted under the uniform GST scenario – this is because,under this scenario, these services become subject to a tax that was not previously applicable. Thus,the price of these services would be higher after the application of GST, while not benefitingsignificantly from the abolition of less efficient taxes.1 The scenarios include the abolition of inefficient taxes as outlined in the scenario descriptions.© 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.ii