2.2 GST Revenue
Indirect tax revenue growth depends on the changing pattern of expenditure over the life cycle. Hence it is influenced partly by the income tax system, in conjunction with taxable income variations, in generating disposable incomes. But of course disposable incomes are also influenced by income from untaxed sources, in particular transfer payments or benefits, including superannuation. Where benefits are taxable, as for example in the case of New Zealand Superannuation, these are recorded net of tax. The projection of GST requires a life-cycle model of non-taxable income similar to that for taxable income, although of course it takes a different shape. In the New Zealand context, projections of GST revenue are considerably simplified by the fact that the GST base is extremely broad. Indeed, it is reasonable to assume for projection purposes that GST is a simple proportion of total expenditure. Without this simplification it would be necessary to have detailed information about the variation in expenditure patterns (the proportion of total expenditure devoted to goods and services which attract GST) with total expenditure and age.
A considerable difficulty is nevertheless introduced by the need to have information about saving patterns. A further simplifying assumption is that the proportion of disposable income that is spent depends on age but is independent of the absolute level of disposable income. By assuming a fixed proportion (depending on age), combined with the broad base of GST, it is necessary only to project the aggregate disposable income of each cohort in each year of the projection period: the distribution can be ignored.
Information about saving rates by age is notoriously difficult to obtain. In particular, there is little knowledge of the rate at which assets are drawn down in retirement (so that the propensity to consume out of disposable annual income exceeds one). The projection model used here uses a simple age-profile of saving rates, where they are calibrated to produce (for the start of the projection period) aggregate GST revenues that roughly match observed aggregates. The profile is then assumed to apply to all cohorts during the projection period.
