Grattan Institute report points to progressive GST increase

The Turnbull government could raise billions of extra dollars from a higher GST while also making the tax more progressive, the Grattan Institute says.

It could be done by providing a generous compensation package for low-income households and modest income tax cuts for individuals earning less than $80,000 a year.

In an innovative new policy proposal – designed to counter those who say any GST increase will hit the poorest hardest – the Grattan Institute's John Daley and Danielle Wood say the Turnbull government could raise an extra $7 billion to $11 billion a year from a higher GST while leaving the bottom 20 per cent of income earners better off, on average.

Current proposals to extend the GST to cover a broader range of goods would raise $17 billion a year, and increasing the rate to 15 per cent would generate about $27 billion, but both ideas would hurt low income households disproportionately hard.

The Grattan Institute says this can be solved by spending roughly 30 per cent of the extra revenue raised from a higher GST on increasing the base rate of all welfare payments – including pensions, Newstart, and family benefits – by 5 per cent.

Channelling a further 30 per cent of revenue to income tax cuts for those earning up to $80,000 would allow the government to shave 1 to 2.5 percentage points off the bottom two tax rates.

Tax cuts of this magnitude would fully offset the GST increase for most low and middle-income households – those earning up to $100,000 a year – while also providing some benefit for those further up the income distribution.

Those tax cuts would also boost the work incentives for low to middle-income taxpayers, who were most responsive to changes in effective tax rates.

That would leave about 40 per cent of the additional revenue raised from a broader or higher GST – between $7 billion and $11 billion – for state governments to improve their health budgets, and for the Commonwealth government to reduce its budget deficit, or to pay for other taxes that promoted economic growth.

Mr Daley said some Australians would end up paying under such a regime, but in many cases that would be fair.

"Self-funded retirees are not getting pensions, they're paying precious little income tax which is, itself, a problem, but they will pay additional consumption tax," he said.

"Bear in mind that people over the age of 65 today are paying less income tax in real terms than they did 15 years ago.

"And that's even though participation rates have gone up – so more of them are working – and even though their hourly rates have gone up like everyone else's has. So everyone else is paying more income tax in real terms than they used to be, but the over-65 cohort isn't."

The Turnbull government has repeatedly said it is not considering raising the GST to 15 per cent.

However, it would like Australians to have the debate.