How a 12 per cent GST could deliver a $100,000 earner an income-tax cut of $34 a week

RAISING the rate of the GST sounds nasty — until you work out what it could mean in terms of personal income tax cuts. We reveal the potential effect here.

Tax - Woman holding a calculator worrying over her tax

EXCLUSIVE

RAISING the rate of the GST to 12 per cent and applying it to fresh food would generate enough cash to cut all income tax rates, boost the tax-free threshold and provide battlers with billions of dollars year in compensation.

A worker earning $50,000 a year would pay $15 a week less in income tax while a person bringing in $100,000 would be $34 better off. Those earning $150,000 would be able to keep an extra $54 a week, analysis by the influential Deloitte Access Economics for News Corp Australia reveals.

Adding GST to fresh food would raise $6 billion a year, Deloitte Access partner Chris Richardson said. Increasing the rate would net a further $12 billion annually.

With this extra $18 billion, all four marginal tax rates could be reduced by 2 cents in the dollar.

Support ... a growing number of voters recognise the need for change.

This would cost $12 billion. Lifting the level at which income tax becomes payable — from $19,400 to $20,400 — would consume another $2 billion. The remaining $4 billion could be paid as compensation, “comfortably ensuring the less well-off are not disadvantaged”, Mr Richardson said.

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Greater reliance on the Goods and Services Tax and reduced dependence on income tax was not only fairer, it would make Australia more prosperous, the former Federal Treasury and International Monetary Fund (IMF) economist added.

“You can and should do it, you just need to properly compensate,” Mr Richardson said.

The emergence of the Deloitte Access modelling adds further credibility to the case for a switch in the tax mix. Not only is there support among business and welfare groups, a growing number of voters recognise the need for change. A national poll published earlier this week found 37 per cent agree the tax should be raised, up from a supporter base of 12 per cent in November 2012.

Research to be released today by the left-leaning Centre for Policy Development (CPD) says: “If Australians want to budget smarter, not harder, the GST reform conversation can no longer be avoided.

Increase ... a recent study found that a 15 per cent GST would raise an extra $26 billion annually.

“Reform to the GST is inevitable,” the CPD report says. “In the long term, this means increasing the rate, shifting to more comprehensive coverage, or actively moving away from reliance on a narrowing GST as a key feature of the tax system and federal financial relations.”

In its report, the CPD — set up by John Menadue, former private secretary to Labor prime minister Gough Whitlam — says “muddling through” with the existing GST will create pressure on “government expenditures and public services that are relied on disproportionately by lower income households”.

Labor opposes any change in the GST.

CPA Australia policy head Paul Drum said: “The OECD and IMF are telling us every year that we are out of step and we need to rely more on consumption taxes.”

Only three of 33 Organisation for Economic Co-operation and Development member countries have a lower-rate consumption tax than Australia.

A recent KPMG study for Mr Drum’s accounting body found that a 15 per cent GST would raise an extra $26 billion annually, funding income tax cuts and the abolition of state duties on insurance, conveyancing and motor vehicles.

“These state taxes are an economic handbrake,” Mr Drum said. “If we are going to create jobs and maintain standards of living in Australian we really don’t see an option of doing nothing at all.”

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