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Modelling the Impacts of a Cut to Company Tax in Australia

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  • J.M. Dixon
  • J. Nassios

Abstract

We investigate the impact of a cut to the company tax rate using a miniature version of the Vic-Uni computable general equilibrium model of the Australian economy with additional detail on ownership of physical capital. Because of Australia's system of dividend imputation, a change to the company tax rate only affects the final post-tax rate of return for foreign investors. Therefore a cut to the company tax rate would transfer government revenue to foreigners, and add to pressure on government to reduce spending or to raise personal taxes. We concur with the Treasury's finding that a cut to the company tax rate would attract more foreign investment to Australia, making workers more productive and increasing wages and output. However, there is a lag between new investment activity and capital growth, and a large share of future company profits will accrue to foreign investors. We also find that increased wages will reduce returns to domestically owned capital. While the impact on national production, as measured by GDP, will be positive, this is not a suitable measure of national benefit. The right indicator of national benefit is the impact of a company tax rate cut on national income and we find that this will fall.

Suggested Citation

  • J.M. Dixon & J. Nassios, 2016. "Modelling the Impacts of a Cut to Company Tax in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-260, Victoria University, Centre of Policy Studies/IMPACT Centre.
  • Handle: RePEc:cop:wpaper:g-260
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    References listed on IDEAS

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    1. Ellis Connolly & David Orsmond, 2011. "The Mining Industry: From Bust to Boom," RBA Research Discussion Papers rdp2011-08, Reserve Bank of Australia.
    2. Ellis Connolly & David Orsmond, 2011. "The Mining Industry: From Bust to Boom," RBA Annual Conference Volume (Discontinued), in: Hugo Gerard & Jonathan Kearns (ed.),The Australian Economy in the 2000s, Reserve Bank of Australia.
    3. Xavier Rimmer & Jazmine Smith & Sebastian Wende, 2014. "The incidence of company tax in Australia," Economic Roundup, The Treasury, Australian Government, issue 1, pages 33-47, April.
    4. Peter B. Dixon & James. A. Giesecke & Maureen T. Rimmer, 2015. "Superannuation within a financial CGE model of the Australian economy," Centre of Policy Studies/IMPACT Centre Working Papers g-253, Victoria University, Centre of Policy Studies/IMPACT Centre.
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    Citations

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    Cited by:

    1. John Freebairn, 2018. "Opportunities and Challenges for CGE Models in Analysing Taxation," Economic Papers, The Economic Society of Australia, vol. 37(1), pages 17-29, March.
    2. Leigh, Andrew, 2018. "Do firms that pay less company tax create more jobs?," Economic Analysis and Policy, Elsevier, vol. 59(C), pages 25-28.
    3. Jason Nassios & John Madden & James Giesecke & Janine Dixon & Nhi Tran & Peter Dixon & Maureen Rimmer & Philip Adams & John Freebairn, 2019. "The economic impact and efficiency of state and federal taxes in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-289, Victoria University, Centre of Policy Studies/IMPACT Centre.
    4. David Rodgers & Jonathan Hambur, 2018. "The GFC Investment Tax Break," RBA Research Discussion Papers rdp2018-07, Reserve Bank of Australia.
    5. Jason Nassios & James A. Giesecke & Peter B. Dixon & Maureen T. Rimmer, 2016. "Superannuation and Macroeconomic Growth and Stability," Centre of Policy Studies/IMPACT Centre Working Papers g-267, Victoria University, Centre of Policy Studies/IMPACT Centre.
    6. J.M. Dixon & J. Nassios, 2018. "The Effectiveness of Investment Stimulus Policies in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-282, Victoria University, Centre of Policy Studies/IMPACT Centre.
    7. Janine M. Dixon & Jason Nassios, 2018. "A Dynamic Economy-wide Analysis of Company Tax Cuts in Australia," Centre of Policy Studies/IMPACT Centre Working Papers g-287, Victoria University, Centre of Policy Studies/IMPACT Centre.
    8. Roos Elizabeth & Adams Philip, 2019. "Fiscal Reform – Aid or Hindrance: A Computable General Equilibrium (CGE) Analysis for Saudi Arabia," Working Papers 1317, Economic Research Forum, revised 21 Aug 2019.

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    More about this item

    Keywords

    Forecasting; CGE models; profit tax; labour markets;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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