The Creation and Impact of the GST (Goods and Service Tax)

The GST (Goods and Services Tax) proposed by the Howard government is a new tax which plans to add ten percent to the cost of every item purchased whether it be a car or a pen with only a few exceptions. The tax set to commence on July 1 2000 may still not become a reality if the senate does not have a majority vote on the issue. The VAT (Value Added Tax) of the United Kingdom is much the same tax adding seventeen and a half percent to all goods and services (although there are exceptions).

This tax is currently in operation in the UK. Differences between the proposed GST and VAT are not great but there are some significant differences.

If and when the GST becomes a reality a range of taxes including wholesale sales tax and provisional tax will disappear when the GST appears. Daily consumables and services will rise as a result of the GST. The government is promising to balance the tax by creating household savings through lower marginal tax rates.

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The question is, will this be sufficient compensation? It probably will not be. The ^Aussie battler will not be favoured with the GST, as the current compensation being offered is simply not sufficient. This tax proposal is yet to be passed by the Senate which means that the GST may not even become a reality. There may have to be some changes to the GST for it to be passed by the Senate without another federal election.

Some of these may be food to be exempt from the GST, more compensation for lower income families, pensioners, etc. Although the government will receive ten percent of every item sold, not many items will actually rise by the full ten percent; estim! ated rises for goods and services will often be significantly lower than ten percent. For example, food is predicted to only rise four percent. Clothing and footwear will rise six point eight percent but electrical goods will fall by twenty two percent because of the current thirty two percent tax which will be replaced by the ten percent GST. Health and education will be supposedly GST free, but schoolbooks and uniforms will still attract the regular GST of ten percent. Childcare will not be taxed, financial services will be. Renting will not attract a GST but prices are expected to rise, as landlords will have to pay extra for repairs and maintenance of properties. The sale of existing homes will not have a GST placed on them but new homes are expected to rise by four point seven percent. Council and water rates will be GST-exempt. Cars will have the GST but cars worth more than sixty thousand dollars will have a twenty five percent luxury tax. Vehicle registration will be free and public transport will have a part GST on it which will be less than the standard ten percent. If the GST becomes a reality it will certainly have a big impact on society, whether it be for the better or for the worse.

The VAT is an important method of raising revenue for the government in the UK. It is an indirect tax as it taxes expenditure. It is possible to see the effect on both macro-economic variables and individual families. Although it will be different to Australia's proposed GST it may give us an idea of the impact of the GST if it is passed by the Senate or in future elections.

The VAT also has exemptions. There is no VAT on most food, newspapers and children ́s clothes. Fuel (electricity etc.) also used to be exempt from the VAT but a few years ago the conservative government took this away. There was an uproar in the House of Commons for these services to be increased to seventeen and a half percent so it was limited to eight percent, but every other good or service is charged at seventeen and a half percent VAT. The tax is not paid directly by the consumers, the firm pays VAT on all the goods and materials they buy and they also charge VAT on all the goods they sell so the costs are passed onto the consumer. In this way the GST is different to the VAT as with the GST you must pay tax on both goods and services but with the VAT you only have to pay tax on the goods you buy and not the services directly although the service suppliers may charge a premium because of the materials they must purchase.

Here is a table displaying the amount of tax on a variety of different goods. The table will probably be quite similar to a certain extent if the GST becomes a reality in Australia: (all figures in pence) price duty VAT total tax as a % of price Cigarettes 336 214.7 50 264.7 78.8 Wine 305 108.5 45.4 153.9 50.5 Whisky 1149 547.7 171.1 718.8 62.6 Beer (pint in pub) 166 24.7 24.7 49.4 29.8 Petrol (per litre) 69 45.1 10.3 55.4 80.2 There are two main types of indirect tax in the UK. There is only one in Australia currently, which is the per-unit tax which is where the amount charged is always the same on each unit. An example of this would be duties on alcohol or cigarettes. The other type is and ad-valorem tax which is where the tax is charged as a percentage of a good, this is what the VAT is in the UK, as it is always charged at seventeen and a half percent.

As you can see, the VAT is much more easily analysed as it is already in action in the UK and GST has not yet been approved in Australia.

Both of these taxes are indirect as well as regressive (a tax that represents a smaller proportion of a person's income as their income rises. In other words the average rate of taxation falls). This does not support Adam Smith's theory that taxes should be linked to ability to pay^. It is obvious that these taxes will hit less well-off people harder than the better-off, which is why compensation is required to reimburse these people after they have paid a GST or VAT. Overall, the taxes appear to be quite similar besides the fact that the VAT is seven and half percent more than the GST, although the GST may rise after a period of time if it becomes a reality.