CoPS/IMPACT Working Paper Number G-278

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

Author: J.A. Giesecke and N.H. Tran


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).

JEL classification: C68, H25, H73, R13, D57.

Key words:Goods and services tax, value added tax, dynamic CGE, regional CGE.

Please cite the later published version in:
Giesecke, J.A. and N.H. Tran. (2018), The National and Regional Consequences of Australia's Goods and Services Tax, The Economic Record, Vol. 94, Issue 306, pp. 255-275.
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A paper extending the methodology in this working paper, and expanding its coverage to all eight Australian states and territories, is published in: Giesecke, J.A., C. King, J. Nassios, N.H. Tran. (2021), The impact of GST reform on Australia's state and territory economies, Applied Economics.
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