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A Dynamic Economy-wide Analysis of Company Tax Cuts in Australia

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  • Janine M. Dixon
  • Jason Nassios

Abstract

We provide a comprehensive analysis of the economy-wide implications of company tax cuts in Australia. This is achieved using VURMTAX, a bottom-up, multi-regional computable general equilibrium (CGE) model of Australia's states and territories with detailed fiscal accounts. We find that a five percentage point reduction in Australia's legislated rate of company tax stimulates growth in investment, real GDP, and real consumer wages. However, real national income and household consumption both fall when the company tax rate is cut, diminishing economic welfare. As we show, this finding is insensitive to: (i) changes in the timing of the tax cuts, i.e., an overnight cut drives similar long-run impacts to staged reductions, or (ii) whether investors form views on expected rates of return on capital via adaptive or forward-looking expectations. The marginal excess burden (MEB) for company tax is therefore negative. This finding contradicts previous studies, which derive a large, positive MEB for company tax. We identify six differences between modelling assumptions applied herein, and those used in a previous study for Australia (Cao et al. 2015). As we show, these six factors explain 84 per cent of the difference between MEB estimates derived from VURMTAX and Cao et al.

Suggested Citation

  • 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.
    • Handle: RePEc:cop:wpaper:g-287
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    References listed on IDEAS

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    Cited by:

    1. Ross Garnaut & Craig Emerson & Reuben Finighan & Stephen Anthony, 2020. "Replacing Corporate Income Tax with a Cash Flow Tax," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 463-481, December.
    2. Xianglong Locky Liu & James Giesecke & Jason Nassios, 2023. "The Economic Effects of an International Student Levy Under Alternative Price Elasticity Assumptions," Centre of Policy Studies/IMPACT Centre Working Papers g-343, Victoria University, Centre of Policy Studies/IMPACT Centre.
    3. James A. Giesecke & Nhi H. Tran & Robert Waschik, 2021. "Should Australia be concerned by Beijing’s trade threats: modelling the economic costs of a restriction on imports of Australian coal," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 65(1), pages 1-22, January.
    4. Paul J. Burke, 2023. "On the way out: Government revenues from fossil fuels in Australia," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 67(1), pages 1-17, January.
    5. Jason Nassios & James Giesecke & Xianglong Locky Liu, 2024. "An impossible triangle? The impact of housing policy on affordability, accessibility, and efficiency," Centre of Policy Studies/IMPACT Centre Working Papers g-344, Victoria University, Centre of Policy Studies/IMPACT Centre.
    6. 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.
    7. Xianglong Liu & Jason Nassios & James Giesecke, 2022. "Oil Supply Shocks and Tax Policy Responses in Australia: Insights from a Dynamic CGE Framework," Centre of Policy Studies/IMPACT Centre Working Papers g-336, Victoria University, Centre of Policy Studies/IMPACT Centre.
    8. J.A. Giesecke & R. Waschik & N.H. Tran, 2019. "Modelling the Consequences of the U.S.-China Trade War and Related Trade Frictions for the U.S., Chinese, Australian and Global Economies," Centre of Policy Studies/IMPACT Centre Working Papers g-294, Victoria University, Centre of Policy Studies/IMPACT Centre.
    9. 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.
    10. Liu, Xianglong Locky & Nassios, Jason & Giesecke, James, 2024. "To tax or to spend? Modelling tax policy responses to oil price shocks," Energy Policy, Elsevier, vol. 185(C).
    11. Dixon, Janine & Nassios, Jason, 2019. "Evaluating gender impacts in employment: A CGE framework for policy makers," Conference papers 333123, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.

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    More about this item

    Keywords

    Taxation policy; CGE modelling; Dynamics; Excess burden;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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