GTAP Resources: Resource Display
| GTAP Resource #5387 |
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"The impact of a cut to company tax in Australia" by Dixon, Janine and Jason Nassios Abstract In Australia’s 2016 federal election campaign, the incumbent conservative government sought a mandate to cut company tax from 30 per cent to 25 per cent, gradually phasing in the cut over 10 years. We find that a cut to company tax would stimulate growth in GDP and pre-tax real wages, but cause a fall in domestic income. The key is that a cut to company tax changes the relative treatment of local and foreign investors in Australia. Local investors are effectively taxed at their personal rate, not at the company tax rate, because of Australia’s dividend imputation system. Only non-resident investors are taxed at the company tax rate. Cutting the company tax rate dilutes the advantage that the dividend imputation system confers on local business owners and investors. To model a company tax cut, we identify the local and foreign ownership proportions of capital in each industry in a dynamic CGE model of the Australian economy. The initial tax rates and model shocks reflect dividend imputation for resident investors only. When company tax is cut, there is an immediate windfall gain to foreign investors, pushing down gross national income. In the short run, the post-tax rate of return on foreign investment is elevated, attracting investment and gradually increasing the foreign-owned capital stock in Australia. This leads to accelerated wage growth, which eventually pushes post-tax rates of return back to original levels. The economy settles at a new growth path, with a larger capital stock, higher wages, and higher GDP. Despite the increase in GDP, gross national income, a better measure of domestic welfare, remains below the baseline. This exercise illustrates the suitability of dynamic CGE modelling for a policy in which the cost – the windfall gain to non-resident investors – is incurred in the short run, but the benefits occur in the long run. |
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- Dynamic modeling - Economic growth - Foreign direct investment - Oceania |
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Public Access No documents have been attached. Restricted Access No documents have been attached. Special Instructions full paper to be uploaded by April 30 |
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Last Modified: 9/15/2023 1:05:45 PM
