Assignment Details
Suppose that the Australian government is considering giving households some tax relief in the near
future through income tax cuts, and at the same time also contemplating an increase in the Goods and
Services Tax (GST).1
Using the geometric techniques and concepts learnt in Topic 1, write a report that examines how the
above stated policies may affect the consumption choices and welfare of a household that purchases
two types of goods: GST exempt Food , and GST taxed Other goods .
In writing the report, consider the following pointers:

(i) Consider the GST to be an ad valorem tax levied on all goods and services (that is Other goods )
except for food. Assume that a household considers GST exempt Food to be inferior and GST taxed
Other goods to be normal.
(ii) You should begin by explaining how a standalone or pure GST increase would affect a
household’s consumption choice and welfare. In this context, you should also briefly mention (i.e.
explain in words) how the welfare impact of the GST increase on a household may depend on its
relative preferences between the two types of goods. (9 points)
(iii) Next, you should explain how a standalone or pure income tax cut would affect a household’s
consumption choice and welfare for a given set of preferences between the two goods. (6 points)
(iv) Subsequently you should consider the combined impact of the two policy changes where a
household simultaneously experiences both a GST increase and receives an income tax cut. For a
given set of preferences between the two goods, explain and geometrically illustrate the circumstances
that determine whether the household is better off, indifferent or worse-off under such a combined
policy. (11 points)
(v) Based on your analysis, briefly comment on the welfare impact of such a combined policy on
households that are purely reliant on Centrelink transfer payments such as Newstart allowances. (4
points)
1 Indeed some recent media reports hint at such a possibility. For example, consider the article Soothing tax
cuts to follow budget pain as published in The Age on the 31st of May, 2014.