5 Consumption Tax Revenue
This section extends the above model to consider consumption tax revenue projections. The approach is simplified by the fact that the GST in New Zealand is broad-based, so that it can be approximated by a proportional tax on total consumption. The basic framework is set out in subsection 5.1. An important difference from the treatment of income taxation is that it is necessary to consider disposable income, rather than simply income from wages, salary and self employment. Income profiles are augmented by an additional model of the variation in mean income from other (non-taxable) sources. The corresponding income profile estimates are reported in subsection 5.2. Subsection 5.3 reports projection results for New Zealand.
5.1 A Broad-Based Consumption tax
Suppose the tax exclusive rate of GST is v, so that the tax-inclusive rate is v′ = v/ (1 + v). For a broad-based tax structure like the GST in New Zealand, it is reasonable to suppose that this rate applies to all consumption expenditure. Suppose that the proportion of disposable income that is spent by cohort c at time t is equal to δt,c; that is, the simplifying assumption is made that this proportion is independent of the level of income. The average annual non-taxed income (including superannuation and other benefits measured net of any tax) received are equal to bt,c, and it is assumed that all this is spent in the year it is received. The GST paid by cohort c at t is therefore given by:
The total income tax plus GST paid in year t, denoted Tt, is thus:
where the second summation is over a wider range of cohorts to allow for consumption by retired individuals.
