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The effects on consumer welfare of a corporate tax cut

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  • Chris Murphy

Abstract

This paper analyses in two ways the effects of an Australian Government proposal to reduce the corporate tax rate from 30 to 25 per cent. Murphy (2016a) modelled the proposal for the Australian Treasury using CGETAX (Murphy, 2016b), a large-scale, long-run CGE model designed for tax policy analysis. The gain in the real wage is estimated at 1.0 per cent. Depending on how the company tax cut is funded, the net gain in annual consumer welfare is between $4.1 billion and $5.2 billion in 2015/16 terms and the associated gain in real GDP is from 0.7 to 0.9 per cent. This paper also uses a highly stylised version of CGETAX to provide a theoretical analysis of the proposed tax cut, applicable to advanced, open economies in general. Echoing CGETAX including by allowing for imperfect competition, the Stylised model shows an increase in the capital-labour ratio from the reduction in the cost of capital, an increase in the labour supply induced by a higher real wage when the tax cut is passed on from internationally mobile capital to labour, and a reduction in the incentive to shift profits to lower-taxed jurisdictions (de Mooij and Devereux (2009)). This paper also discusses the likely timing on the introduction of the tax cut and the economic responses to it.

Suggested Citation

  • Chris Murphy, 2016. "The effects on consumer welfare of a corporate tax cut," Departmental Working Papers 2016-10, The Australian National University, Arndt-Corden Department of Economics.
    • Handle: RePEc:pas:papers:2016-10
    as

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    File URL: https://acde.crawford.anu.edu.au/sites/default/files/publication/acde_crawford_anu_edu_au/2016-05/2016-10_cmurphy_company_tax3.pdf
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    References listed on IDEAS

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    8. Liangyue Cao & Amanda Hosking & Michael Kouparitsas & Damian Mullaly & Xavier Rimmer & Qun Shi & Wallace Stark & Sebastian Wende, 2015. "Understanding the economy-wide efficiency and incidence of major Australian taxes," Treasury Working Papers 2015-01, The Treasury, Australian Government, revised Apr 2015.
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    More about this item

    Keywords

    computable general equilibrium models; oligopoly; corporate tax; Australia;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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