Impact of a reduction of distortions in a flat consumption tax I ask about the survey results of some prominent Australian economists shown here (Which is a similar Australian-centric version of the very interesting IGM Forum Surveys). The results of the survey surprised me as it isn't what I was expecting.


“Increasing government revenue collected through the Goods and Services Tax (GST) by removing exemptions (such as food, health and education) is better than achieving the same extra revenue by increasing the GST rate while retaining the existing exemptions.”


My question is, is there any empirical or other research on the impact of transition from a distortionary to a less distortionary tax which could be applied to the Australian case?
There is theoretical work on the matter in general. In fact, many standard models of optimal consumption taxation will typically yield a distortion that is increasing and convex in the rate of taxation. This means that increasing a tax on a good from 5% to 6% results in higher distortion than increasing it from 2% to 3%. Following this logic, it is better to tax many goods at a low rate than to tax few goods at a high rate, as the distortion would be smaller. This means that removing the exemptions (taxing goods with a currently lower rate of taxation than the rest) is better than increasing the tax rate on previously taxed goods (since they have a currently higher rate than the exempt goods). To conclude, it means that the distortion from taxing exempt goods, which would mean going from 0% to e.g. 20%  (assumed current VAT in Australia) is lower than going from 20% (current tax rate on non-exempt goods) to 40%, or so.

For a reference, see for example slide 30 (and a few before) in this slide set I found online. Its from Mankiw's Microeconomic Principles.

This however does not take into account any "fairness" considerations or welfare implications for the case of households not being able to afford enough food as a result. So the standard theory may not apply in cases where taxing food at all may lead to starvation, as starvation is not considered. However this is likely not the case anyway for such a rich economy as Australia that has other means of providing welfare (incl. food) to the needy.