Tax Reform Australia

Transaction Taxes

Transaction taxes are indirect taxes paid by those who receive a good or service. The economic effect of a transcation tax is exactly the same as the effect of direct taxes on the receipts of labour or the return on capital investment. The political effect however, as Pitt the Younger pointed out, can often be somewhat different. Practising what he preached, Pitt the Younger introduced a wide variety of transaction taxes on various luxury items.

A transaction tax increases the cost of a good or service to the consumer, thereby reducing demand. Part of the consumer and producer surplus is converted into government revenue and there is some deadweight loss in addition to whatever administrative requirements are necessary. Depending on the elasticity of the demand curve, the effects on sales can be substantial. Interestingly, the highest transaction taxes are often levied on drugs of dependence which have a relatively low effect on demand, but a substantial effect in raising government revenue.

In Australia, transaction taxes include tariffs on foreign imports, the Goods and Services Tax (G.S.T.) which is levied by the Federal government, but with receipts going to State governments, Stamp Duty on property purchases, levied by State governments, petrol taxes, nominally used to pay for roads and various so-called "sin taxes", such as surcharges on tobacco and alcohol.

The GST (Goods and Services Tax) is a value added tax of 10% on most new goods and services, excluding some food, health and education items. As a flat rate tax, the effects are regressive with lower-income earners paying a greater portion of their income than higher-income earners. In the months before the GST was introduced there was a spike in consumption as consumers rushed to purchase goods. When the tax came into effect consumption plummetted and the Australian economy plunged into negative growth for the first time in more than 10 years.