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The National and Regional Consequences of Australia's Goods and Services Tax

Author

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  • J.A. Giesecke
  • N.H. Tran

Abstract

Previous modelling of the Australian goods and services tax (GST) has: (a) used models of the national economy; and (b) modeled the GST as an indirect tax on various tax bases (like consumption and investment) without taking formal account of the complex underlying details of the operations of the GST system as they relate to its legislated features and its interactions with the structure of economic activity. In this paper we improve on previous modelling by: (a) modelling the GST within a multi-regional framework that allows for the identification of the commodity-, source-, user-, and region-specific details of economic transactions; (b) modelling the legislated details of the GST as it relates to the commodity-, source-, user-, and region-specific details of legislated GST rates, legislated GST exemptions, agent- and region-specific details of entities registered for GST, multiproduct detail as it relates to the capacity of agents to reclaim GST paid on inputs, informal economic activity, the low value import threshold, transaction-specific compliance rates, and taxation of on-shore purchases by non-residents. In a model like this, when we change any individual element of the GST (for example, by raising existing rates, taxing currently GST-free goods like basic foods, removing exemptions such as on finance, removing the low value import threshold) the economic effects are informed by regional differences in economic structure and their interactions with the commodity- user- and source-specific details of our GST theory. In this paper, we report on the effects of a rise in the standard GST rate from 10% to 11%. We decompose regional and national effects into six components: (i) The effects of the GST rate rise with endogenous state and federal public sector borrowing requirements (PSBRs) and endogenous balance of trade to GDP ratio; (ii) The effects of the federal government granting to each state the amount of GST collected within each state; (iii) The effects of a correction to the state grant allocations under (ii) to reflect the effects of Commonwealth Grants Commission (CGC) allocation on a per-capita basis; (iv) The effects of state governments returning their PSBR's to baseline via endogenous adjustment of lump sum payments to households; (v) The effects of the federal government returning its PSBR to baseline via adjustment of lump-sum household taxes and transfers; (vi) The effects of adjustments to the average propensity to save required to leave the national balance of trade to GDP ratio unaffected by the shocks described by (i)-(v).

Suggested Citation

  • J.A. Giesecke & N.H. Tran, 2017. "The National and Regional Consequences of Australia's Goods and Services Tax," Centre of Policy Studies/IMPACT Centre Working Papers g-278, Victoria University, Centre of Policy Studies/IMPACT Centre.
  • Handle: RePEc:cop:wpaper:g-278
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    References listed on IDEAS

    as
    1. Philip Adams & Janine Dixon & Mark Horridge, 2015. "The Victoria University Regional Model (VURM): Technical Documentation, Version 1.0," Centre of Policy Studies/IMPACT Centre Working Papers g-254, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. Giesecke, James A. & Nhi, Tran Hoang, 2010. "Modelling value-added tax in the presence of multi-production and differentiated exemptions," Journal of Asian Economics, Elsevier, vol. 21(2), pages 156-173, April.
    3. Peter B. Dixon & Maureen T. Rimmer, 1999. "Changes in Indirect Taxes in Australia: A Dynamic General Equilibrium Analysis," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 32(4), pages 327-348, December.
    4. James Giesecke & Peter B. Dixon & Maureen T. Rimmer, 2008. "Regional macroeconomic outcomes under alternative arrangements for the financing of public infrastructure," Papers in Regional Science, Wiley Blackwell, vol. 87(1), pages 3-31, March.
    5. James Giesecke & Nhi Hoang Tran, 2012. "A general framework for measuring VAT compliance rates," Applied Economics, Taylor & Francis Journals, vol. 44(15), pages 1867-1889, May.
    6. Giesecke, James A. & Madden, John R., 2013. "Regional Computable General Equilibrium Modeling," Handbook of Computable General Equilibrium Modeling, in: Peter B. Dixon & Dale Jorgenson (ed.), Handbook of Computable General Equilibrium Modeling, edition 1, volume 1, chapter 0, pages 379-475, Elsevier.
    7. Lourenço S. Paz, 2015. "The welfare impacts of a revenue-neutral switch from tariffs to VAT with intermediate inputs and a VAT threshold," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 24(4), pages 465-498, June.
    8. Stephen Marks, 2005. "Proposed changes to the value added tax: implications for tax revenue and price distortions," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 41(1), pages 81-95.
    9. Gottfried, Peter & Wiegard, Wolfgang, 1991. "Exemption versus zero rating : A hidden problem of VAT," Journal of Public Economics, Elsevier, vol. 46(3), pages 307-328, December.
    10. Fan Zhai & Jianwu He, 2008. "Supply-side Economics in the People's Republic of China's Regional Context: A Quantitative Investigation of Its VAT Reform," Asian Economic Papers, MIT Press, vol. 7(2), pages 96-121, Spring/Su.
    11. Kehoe, Timothy J. & Noyola, Pedro Javier & Manresa, Antonio & Polo, Clemente & Sancho, Ferran, 1988. "A general equilibrium analysis of the 1986 tax reform in Spain," European Economic Review, Elsevier, vol. 32(2-3), pages 334-342, March.
    12. Toh, Mun-Heng & Lin, Qian, 2005. "An evaluation of the 1994 tax reform in China using a general equilibrium model," China Economic Review, Elsevier, vol. 16(3), pages 246-270.
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    Cited by:

    1. Jason Nassios & John Madden & James Giesecke & Janine Dixon & Nhi Tran & Peter Dixon & Maureen Rimmer & Philip Adams & John Freebairn, 2019. "The economic impact and efficiency of state and federal taxes in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-289, Victoria University, Centre of Policy Studies/IMPACT Centre.
    2. repec:eee:ecmode:v:81:y:2019:i:c:p:111-123 is not listed on IDEAS

    More about this item

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

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