GST reform in Australia: Implications of estimating price elasticities of demand for food

Abstract

This paper uses detailed information about household supermarket purchases from the Australian Nielsen Homescan Survey to estimate price elasticities of demand for a range of food categories. An instrumental variable strategy is employed to address endogeneity issues. The estimates obtained from our analysis are used to study five scenarios in which the rate of the GST on food categories is increased or in which the tax base is broadened to include currently GST-free categories. Our findings reveal that there is considerable scope for raising revenue by increasing the rate and broadening the tax base. Low-income households (the bottom 40% of the income distribution) can be compensated for the loss in consumption induced by a tax increase. We demonstrate that increasing the rate of the GST from 10% to 15% and broadening the tax base would increase tax revenues by up to $7.1 billion, whereas compensating low-income households would require up to $2.2 billion. We also provide a detailed list of tax revenues and compensation payments associated with each food category to allow readers to "build their own tax reform" by choosing the categories that should be taxed. Show more