The Changing Effects of Government Tax Policy on Households

Effects of Government Tax Policy 8


Effects of Standalone GST Increase on Households

The Goods and Service Tax (GST) is an example of a consumption tax, which is relatively resourceful since consumption is an extensive tax base and if they are applied equally, the GST does not alter the pricing of goods, thus, does not distort the consumption pattern (Australia 2012). However, by assuming that the GST is an ad valorem task, there would be exceptions on the type of goods and services levied, which exempts food. A standalone GST increase would affect a household’s consumption and welfare in various ways. In instances where the GST is well designed, all goods and services are taxed fairly and increase in the prices of goods is proportional regardless of the product (Quayle & Christiansen 2004). However, it affects the household’s behavior of purchasing goods since it acts as a personal tax on their income hence, reducing their purchasing power. As a result, household consumption tends to reduce due to the increased prices on goods and services.

Nonetheless, each of the goods and services exist within different rates such as the zero-rated, taxable and input-taxed. Households in this case only purchase two types of goods, foods and other goods. By doing so, foods were exempted and other goods such as luxury items accrue tax charges. This means that there are variations in the taxing of goods, where the prices of some increases than others. A negative impact results as households adjust their consumption choices by substituting towards goods and services having relatively lower levy impacts like foodstuffs.

Normally, as the income of a household increases and the consumption of a good increases, it is viewed as being a normal good but when it decreases, it is viewed as an inferior good. For the given set of goods, different households have diverse preferences depending on their age, income and affordability (Ecker, 2013). A household’s welfare would be impacted depending on its preferences in the sense that those who fancy other goods would experience negative effects compared to those who prefer food, which is exempted from taxation.

Effects of Standalone Income Tax Cut

One of the main determinants of household consumption choices is his/ her income. Thus, a change on the income would have an impact on a household’s consumption preference and welfare (Cordes, Ebel & Gravelle 2005). Reduction of income taxes provides enhances the money supply in a market as it provides people with additional funds to spend on goods. Thus with competition on the need to spend goods such as Before making decisions on the type of good to purchase, a household has to make use of a budget line, which captures the amount of goods that are provided by comparing the income against the prices.

Therefore, reducing the income by conducting an income tax cut, the household would be forced to reduce their consumption and try to restrict their budget to the only affordable products. In such a case, the consumer might be forced to rely on the tax-free goods, which are foods and avoid the other goods. The welfare of the household is also impacted since they are forced to rely on goods, which are affordable, and not of their choice (Remenyi 2005). Meaning, their preferences are not put into consideration while purchasing their goods and services in such scenarios.

The Changing Effects of Government Tax Policy on Households

The graph above illustrates the result of income tax cuts and its effect on the consumption of other goods. It illustrates that the shift in demand for goods in the event that taxes are increased resulting in increase price of other goods compared to food. This results in decline in demand for subsidiary products that have been identified as “other goods”. In this scenario consumers make savings by purchasing necessities such as food, potatoes, and refraining from unnecessary expenditure on luxury items such as champagne that are associated with leisure. The curve mimics a recession where output is relative to investments made in the market.

Effects of Standalone Income Tax Cut and Standalone GST Increase on Households

Policy changes involving GST increase on households and standalone income tax cut has the most impact on a consumer. From geometric techniques, it is evident that income tax and prices are the key determinants in establishing the consumption levels of a household. Most importantly is the fact that income determines the spending while GST increase regulates the consumption (Pittard & Weeks 2007). Increasing the prices would reduce the household’s consumption and at other instances even alter the preferences of goods. Income tax cut also has similar effects on the household.

Thus, a combination of both policies results in a number of impacts. First, the household would be forced to reduce its consumption. If necessary, it would have to alter its preferences, which is the most likely solution. In cases where the preferences are only food and other goods, most households would opt for foods. This is because foods are exempted from taxation. At such a point, individuals who thought exempting food is an inferior move, get to know its importance. In such cases, it is important to determine whether households are worse-off, indifferent or better off using geometrical illustrations.

Geometric Illustration of the Impact of Combined Income Tax Cut and GST Increase on


The Changing Effects of Government Tax Policy on Households 1

Effect of Pure Reliance on Centrelink Transfer Payments

Every individual is required to rely on Centrelink transfer payment such as Newstart Allowance at one point or the other due to the potential employment benefits and allowances one is able to receive. However, the reliance should be limited to certain points because overdependence on them could result in detrimental effects at certain instances. For instance, over reliance on Newstart Allowances when faced by the two tax policies would result in unpleasant situations (Lindby 2010). In order to earn rate of benefit, there are certain regulations to be adhered.

One of the directives for such are a benefit is, the application of a strict income test. By doing so Out of every $1 of an individual’s income, the rate of disbursement is reduced by $1. A close analysis of this statement simply means in special benefits, there are no free areas. Meaning other sources of income have the potential right to reduce the rate of payment. Therefore, for a family facing both taxation policies would suffer, they over rely on Centrelink payment strategies (Australian income tax legislation 2011). Thus, it influences their welfare as well as their respective goods and services preferences.

The Changing Effects of Government Tax Policy on Households 2


Australia 2012. Australian GST legislation: with overview: current to 1 January 2012, N.S.W., CCH Australia, North Ryde.

Australian income tax legislation 2011, CCH Australia, North Ryde, N.S.W.

Cordes, J, J, Ebel, R, D, & Gravelle 2005, The encyclopedia of taxation & tax policy, Urban Institute Press, Washington.

Ecker, T 2013, A VAT/GST model convention: tax treaties as solution for value added tax and goods and services tax double taxation.

Lindby, C 2010, Solutions for Desperately in Debt Australians, Xlibris Corp.

Pittard, M, J, & Weeks, P 2007, Public sector employment in the twenty-first century, A.C.T., ANU E Press, The Australian National University.

Quayle, M, & Christiansen, J, K 2004, Business Issues in the 21st Century.

Remenyi, D 2005, 5th European conference on e-government: University of Antwerp, Belgium 16-17 June 2005, Reading, Academic Conferences.