Prime Minister John Key yesterday told Parliament that increasing GST to 15 percent was being "carefully considered" and would bring in about $2 billion to fund income tax cuts and other reforms.
The Government intends making across the board income tax cuts and raising more revenue from property investors.
Mr Key said the package had the potential to bring in $3-4 billion, which gave the Government room to move.
Nothing is set in stone and the tax changes will be announced in the May 20 budget, with measures to balance the GST increase and protection for low income families and pensioners.
Labour is assuming high income earners will benefit the most through what it says will be a huge cut in the top 38 cents tax rate.
"The essence of National's plan is a massive cut to the top tax rate, apparently funded mainly by a rise in GST," said Labour's finance spokesman David Cunliffe.
"National is trying to claim it will help low-income Kiwis, but no one believes that.
"Families struggling to raise three kids and pay for the week's groceries are frightened."
Green Party co-leader Russel Norman said raising GST would entrench inequality.
"Increasing tax on the poor to pay for tax cuts for the rich ... this is a scam that will only benefit the wealthy," he said.
Labour and the Greens will keep this up until the budget because the figures will not come out until then and the Government won't be able to prove its case until they do.
The Government's aim, explained by Mr Key, is to boost economic growth and living standards through a series of changes that include a big increase in money for research and development.
It also wants to encourage saving rather than spending, and hopes investment will increase as people have more money through income tax cuts.
"The Government would not embark on a policy of increasing GST unless it would benefit the New Zealand economy in the long term, and unless it saw the vast bulk of New Zealanders better off," he said.
Mr Key ruled out a land tax or a capital gains tax, two other options put up by the Tax Working Group that examined the system and delivered recommendations to the Government last month.
Business groups said the tax reforms would promote economic growth and plug holes in the system.
"It is encouraging to see that the Government has a plan and is sticking to it," said Business NZ chief executive Phil O'Reilly.
"Lower income tax and an increase in GST, with benefit adjustments to ease the transition, will be helpful for business growth and competitiveness, and fairer to all."
The business sector would have liked a cut in the company tax rate, which the Government is understood to be considering in the longer term.
Council of Trade Unions economist Bill Rosenberg described the announcement as a missed opportunity to boost jobs and make the tax system fairer.
"This will only further encourage the development of the 'emerging underclass' he (Mr Key) speaks about. The priority should be to reduce inequality, not increase it," he said.
