The new tax package is broad and with the introduction of the higher income taxes it is going to give consumers more of an incentive to buy items as they have more money in their pockets. But this may not be the case, as the new tax regulations mean that items that never use to be taxed are, and previously taxed items will increase in price.
When the new tax regulations are introduced this may, at the beginning, reduce the demand for some products, but these producers may not be able to lower prices as they now have to pay a tax, therefore the dead weight loss may grow in size. Producers may have to reduce the levels they supply because they may not be able to pay the tax, or buy the raw materials now that they have gone up in price.
Although there may seem to be a large amount of problems with the new tax laws, they will end up making all producers even and will not disadvantage some trades as the previous law may have.
Assignment topic Question 3:
Australia’s taxation system will change on July 1 next year to include a broad based Goods and Services Tax (GST), which will be added to the price of most goods and services purchased by consumers. A hair cut is currently untaxed in Australia.
(a) Use a demand and supply diagram to show the impact of the GST on prices and output in the Australian hair cutting industry. (Actual prices and quantities are not required).
(b) Identify and explain the areas of consumer surplus, producer surplus and government tax revenue. In doing so, comment on whether the burden of tax falls only on consumers.
(c) Use your diagram and the concept of deadweight loss to predict the overall effect on welfare as a result of the GST on haircuts.
(d) Part of the new tax package is a reduction in income tax rates. Knowing that taxes change economic incentives explain why the broader based GST tax system may be preferable to the current system of progressive income taxes.