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macro impacts of gst
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The 1998 election by the Liberal party led by John Howard initiated tax reform in Australia. After many years of the rejection of a goods and service tax (GST) this was now an opportunity for the government to apply tax reform which included a GST. The new tax system introduced in July of 2000 initiated major modifications to the old tax system including a 10 per cent sales tax replacing the now abolished wholesales tax, reform to company tax, the deregulation of the market along with changes to individual income tax brackets. The impact of the new tax system will be closely analyzed with the assistance of the aggregate supply (AS) - aggregate demand (AD) model. Probably the most evident change of the tax system was the replacement of some ten hidden taxes with the fixed 10 percent GST. Wholesale taxes, FID, debits tax, ‘bed taxes’ and stamp duties were all replaced. The wholesales tax was a rate varying between 0 per cent up to 45 per cent in certain circumstances. This change from varying tax percentages to one flat rate of 10 per cent has had a large impact on the Australian economy. Direct and indirect taxes were altered within the change, both of which have different effects on the market. The lowering of direct taxes (personal income taxes) discourages the supply of labour and savings while encouraging consumption. Whereas the increase of indirect taxes (the GST) appears to discourage consumption, encourage savings and have no impact on the supply of labour. If we first look at the abolishment of wholesales tax this would lead to a direct impact on aggregate demand.
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