The one-time Labor leader said Mr Taylor was unfit to govern the nation following the release of the policy which he described as racist and an echo of US President Donald Trump.
"By adopting racism with its shabby appeal to differentiation and primal instincts, Angus Taylor marks himself out as a political leader unworthy of the leadership of a party that has managed Australia for the greater part of the last century and which celebrated the country's unifying values," Mr Keating said in a statement.
"How dispiriting for the rest of us is Angus Taylor's cowardice in not even attempting to stand and argue for principles that have been integral to Australia's strength - principles his party has long championed."
Under the coalition proposal, released on Tuesday, migrants would be booted from the country if they did not align with Australian values.
The long-awaited policy announcement did not specify what migrant intake the opposition would target if elected to government.
Mr Taylor said while Australia had a non-discriminatory immigration policy, it should discriminate on values.
Mr Keating said the policy was an attempt to counter a surge in voter support for Pauline Hanson.
"The Liberal Party, battling an extreme version of itself - One Nation - has again fallen back to its default political policy: racism," he said.
"The blight of Pauline Hanson is that her dumb bigotry offers a fantasy. The fantasy that Australia in the modern age can return to a monoculture."
But the opposition leader rejected the criticism from Australia's 24th prime minister, saying Mr Keating was out of step.
"I always suspected that Paul Keating didn't support Australian values, but now he has dropped any pretence," Mr Taylor said.
"To suggest it is 'racist' to put Australian values at the centre of our immigration policy shows just how out of touch he is with Australians, as is the Labor Party.
"This is the immigration policy we have to have. Immigration numbers are too high. Immigration standards are too low. And both must change."
In a speech outlining the migration policy, Mr Taylor said he wanted greater scrutiny on people attempting to come into Australia who weren't from western, liberal democracies.
