Broad vs Targeted Company Tax Reforms: A CGE Analysis of Ten Percentage Point Reductions in Australia

This study assesses the long-run economic impacts of reducing the corporate income tax rate for small and medium turnover firms in Australia. Using an updated and extended version of the VURMTAXG model -- an economy-wide model with detailed fiscal and regional structure -- we simulate three reform scenarios. The core policy reduces the company tax rate to 20 per cent for firms with annual turnover below A$1 billion, funded by higher personal income tax rates. Two comparator scenarios help isolate key policy mechanisms: one applies a uniform company tax cut to all firms (Scenario 1), and another funds the core reform with lump-sum taxation (Scenario 2). All three reforms increase real GDP, investment, output-per-worker, and pre-tax wages by 2050, while keeping total tax revenue unchanged. However, they reduce real Gross National Income (GNI), which is a better indicator of national living standards. In the core scenario, GDP rises by 0.20 per cent, but GNI falls by 0.31 per cent, and per capita welfare declines by A$292 in real terms. Scenario 2 shows that the negative effects on post-tax wages and employment stem from the choice to raise personal income tax, not from the company tax cuts themselves. Scenario 1 delivers stronger GDP growth (1.46 per cent) but also results in the largest GNI loss (0.41 per cent). These results underscore a key trade-off: company tax cuts can boost investment, output-perworker, and GDP, but neither of the modelled scenarios is estimated to generate a boost in real national income. Furthermore, the choice of how to fund the tax cut affects distributional and welfare outcomes. Alternative funding mechanisms not examined herein -- such as taxes on economic rents -- may help to mitigate the trade-off between GDP growth and national income losses, though this remains untested in our framework. Likewise, while applying company tax cuts to firms with below-average foreign ownership shares could moderate adverse effects on national income, our simulations assume that small firms have the same foreign ownership shares as the industry average, and we do not explore deviations from this assumption. Our findings are subject to important caveats. In particular, we abstract from firm behavioural responses to tax thresholds and omit channels through which tax cuts may ease financing constraints. These areas warrant further attention in designing efficient, equitable tax reform. Based on analysis of the three simulations presented herein, we find that the current schedule of corporate income tax rates outperforms any tax cut scenario when national income and welfare are the key metrics. Our key conclusion is that the upfront loss in national income through company tax revenue is not likely to be recovered through the subsequent increase in economic activity. The loss of national income is likely to be subdued when applied to a cohort of companies with lower-than-average foreign ownership shares, but there is still the risk that national income does not fully recover. Even if it does, overall gains may remain small.