Gst Free Threshold

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Economics - 101

A recently story by Clancy Yeates from the Courier Mail dated December 3rd 2012, discusses groundwork laid out by the Australian Federal Government. The government aims to reduce the thousand dollar GST free threshold for goods bought from overseas online stores. The article refers to the assistant Treasurer David Bradbury and how he feels the policy will affect on retailers. Bradbury states “while this is not the biggest challenge confronting the retail sector, the government does recognise that on the basis of fairness and tax neutrality Australian retailers should not be disadvantaged by taxation arrangements which favour overseas retailers”. Bradbury also states “the government also acknowledges that the current threshold of $1000 at which GST is collected on low value parcels is very high by international standards”. Currently, it is one of the highest thresholds in the world.

A landmark review by the productivity commissions last year gave “in-principle” support for cutting the threshold but found it did not yet make economic sense. Economically, this has many effects and can be broken down into three major areas: tariffs, deadweight loss, and gross domestic profit (GDP).

As a workforce becomes more educated and its technology more expansive, labour costs will increase. Due to this, the world price for goods and services sold in Australia is lower due to these labour costs. With technology advancements these goods and services have become more attainable to the Australian public. Thus forcing Australian producers and retailers out of the market due to the world price being lower than the Australian equilibrium. By decreasing the GST free threshold, the government protects local producers by placing a tariff on imported goods. A tariff is a tax imposed by the government on imported goods. Such a tax (tariff) has the effect of raising the price of imported goods making it easier for domestic produced goods to compete within the world price. Consequently, the demand for imported goods decreases and the demand for domestic produced goods increases Steven Suranovic (PHD) in economics explains the affect on international trade, theory and polices, v. 1.0. He proposes that if in theory, a country in free trade imposes a specific tariff on imported goods this will inhibit the flow of international goods across the border. These goods will now cost the same or more to enter into the country (Suranovic, 2010). This makes consumers less likely to use overseas sellers and instead use local producers and sellers of these goods and services thus improving sales to the local economy. These effects can be seen in a current case study into USA tariffs placed on tyres that attempt to stem the flow of cheap tyres from China. An increase of local production by 5-15% was seen as well as lowered importation costs (Peta Whoriskey and Korenblut, 2009).

The negative side to this tax is the deadweight created, increasing the cost to consumers. The definition of a deadweight loss of taxation is a loss of economic wellbeing affecting consumer welfare (investopedia.com). Such outcomes create a loss to society because the money collected as a tax could have been used in a more economically productive way. The loss occurs because taxation makes goods or services less attractive thereby reducing individuals desire to purchase that product. Taxes are also said to create deadweight loss because they prevent people from engaging in purchases they would otherwise make. This is because the final price of the product will be above the equilibrium (world market price).

The consequent increase of costs due to the tariff decreases the consumer’s surplus. This forces some consumers out of the market, as they are not willing to pay at the higher cost. These effects can be seen when the demand curve shifts from the introduction of a tax on pre mixed alcohol (Stockwell and Crosby, 2011, pg....
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