GTAP Resources: Resource Display
| GTAP Resource #7856 |
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"The effects on excess burden of firm-size tax thresholds: the case of New South Wales payroll taxes" Authors: Nassios, Jason and John Madden Abstract This paper considers the implications for excess burden from a tax in the presence of firm-size thresholds. Such thresholds can cause persistent distortions in firms’ long-run input choices, which is not captured in standard CGE tax modelling. We address this problem for the case of payroll taxes in New South Wales where firms pay a tax on all wage bills above $0.75 million. This generates inter-industry distortions due to effective rates differing across industries and intra-industry distortions by inducing a downward bias in firm size. We estimate marginal and average excess burdens of the tax with a multiregional dynamic CGE model of the Australian economy, VURMTAX, which incorporates institutional features of a wide range of taxes levied by state/local and federal governments. Of particular importance here is that we explicitly model firm-size distributions for each Australian state and territory. The interaction between threshold-induced firm-size distortions and rate-induced payroll tax deadweight losses leads to simulation results that contradict some standard ideas. First, the marginal excess burden of an increase in the payroll tax rate is smaller than the corresponding average excess burden. Second, the marginal excess burden of a reduction in the payroll tax threshold (holding the tax rate fixed) is lower than that of an equivalent increase in the payroll tax rate at the existing threshold. Third, eliminating the threshold entirely recovers the deadweight losses associated with firm-size distortions, yielding an improvement in national welfare and implying a negative national average excess burden associated with the NSW payroll tax threshold. Central to these results is the observation that marginal changes in the threshold have little effect on effective tax rates and associated intra-industry, firm-size distortions, whereas complete removal of the threshold eliminates the associated intra-industry distortion altogether. |
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- Domestic policy analysis - Advances in quantitative methods - Dynamic modeling - Model extension/development - Partial and general equilibrium models - Oceania |
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Public Access  GTAP Resource 7856 (837.6 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 4/20/2026 1:44:43 PM
