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At the request of the Department of the Treasury, I prepared a consultancy report, ‘Company Tax Scenario’, which simulated the economy-wide impacts of reducing the company tax rate from 30 to 25 per cent. My report was released by The Treasury on Budget night.
The report used CGETAX, a large-scale Computable General Equilibrium (CGE) model designed for tax policy analysis, to provide detailed numerical estimates of the effects of the company tax cut, in the long run. CGETAX has 278 industries, nine types of produced capital, eight types of labour, as well as land and minerals as fixed factors. It uses the latest ABS input-output tables, which refer to 2012-13. In CGETAX, perfect competition is assumed in many industries, but a Cournot-Nash oligopoly is included to account for persistently high above normal rates of returns in certain sectors: finance, telecommunications and beverages. Assuming perfect international capital mobility, in the long run the incidence of company tax is passed on from capital to labour. Hence, the company tax cut leads to an increase in consumer real wages. It also leads to higher consumer welfare by reducing disincentives to demand capital and supply labour, and by reducing the incentive to incur tax avoidance costs through profit shifting. Depending on the method of funding the company tax cut, the net gain in annual consumer welfare is between $4.1 billion and $5.2 billion in 2015/16 terms. The associated gain in real GDP is from 0.7 to 0.9 per cent. The most important parameter values determining the magnitudes of these gains are the elasticity of substitution between capital and labour (0.7 to 0.9), the compensated elasticity of the labour supply with respect to the marginal, post-tax real wage (0.4) and the semi-elasticity of the company tax base with respect to the company tax rate in relation to profit shifting (-0.73).
The note provides a companion theoretical analysis to the report. It uses a highly stylised version of CGETAX to analytically derive key results, including the effects of the company tax cut on consumer welfare and GDP. The aim is to add transparency to the theoretical underpinnings of the report and to identify the key parameters that drive the main results from the company tax cut. The note also explains the similarities and differences in the results with other company tax modelling, including in a Treasury Working Paper (Kouparitsas, Prihardini and Beames, 2016) and a COPS Working Paper (Dixon and Nassios, 2016). Finally, it discusses the issue of timing, including the phasing of the company tax cut announced in the Budget and the timing of the economic responses to those tax cuts.