PRICE INDEXES AND THE NEW TAX SYSTEM
As part of The New Tax System (TNTS), a goods and services tax (GST) was introduced on 1 July 2000 to replace the existing wholesale sales tax (WST) and some State and Territory taxes. Unlike the WST, which was only levied on selected goods, the GST applies to most services as well as most goods. TNTS had implications for both the consumer and producer price indexes.
TNTS had both a direct and indirect impact on the CPI. The CPI continues to measure the final transaction prices inclusive of indirect taxes and hence it reflects the net effect of the tax changes in TNTS.
As a consequence of the implementation of TNTS, the CPI recorded an increase in the September quarter 2000. Most Australians would like to know "What was the total impact of TNTS on the CPI?". Unfortunately, this is not a question that can be answered precisely. To assist users and analysts of CPI data, the ABS compiled an experimental constant tax rate measure, which it published in the December 2000 issue of Australian Economic Indicators (1350.0). This measure, which provided an estimate of what the percentage movement between the June and September quarters 2000 CPI would have been if tax rates were held constant at those prevailing at June quarter 2000, had a number of significant limitations. Specifically:
- the measure only abstracted from the direct or first round effects of tax changes on the prices of consumer goods and services. It could not, for example, account for the effects of changes in petroleum excise on the price of a jar of jam, but did account for the change in petrol excise on petrol purchased by households for use in their motor vehicles;
- in compiling the measure it was assumed that ad-valorem taxes are levied in proportion to final selling prices. This means that where ad-valorem taxes levied on wholesale prices (such as WST) were replaced by ad-valorem taxes levied on retail prices (such as the GST), the measure overstated the non-tax component of price change and therefore understated the impact of tax change on the CPI; and
Because of these limitations, the ABS recommends that care should be taken when using the experimental constant tax rate measure to provide an estimate of the impact of TNTS on the CPI.
However, TNTS had no direct impact on producer price indexes, except for the Price Index of Materials Used in House Building and the Price Index of Materials Used in Building other than House Building. The removal of the wholesale sales tax has had a downward influence on some of the prices of building materials. The changes to the diesel rebate scheme, another aspect of TNTS, had some downward influence on the diesel component of the Price Index of Materials Used in Coal Mining.
Indirect effects of TNTS should have some downward influence on all producer price indexes.
For more information on the impact of TNTS on the ABS's price indexes, see Information Paper: Price Indexes and The New Tax System (6425.0) and the December 2000 issue of Australian Economic Indicators (1350.0).
- the constant tax rate measure was constructed with reference to the scheduled rates of tax prevailing in the June quarter 2000. This meant that no allowance was made for tax changes implemented before that quarter.