ANÁLISIS DE REQUERIMIENTOS

In 2015-16 the total revenue from municipal rates by all NSW Councils was $4,169 million.58 To calibrate council rate collections in VURMTAX, we relied on council rate revenue by source shares in Page (2011), which highlighted that 65 per cent of council rate collections in NSW

57 _{See Office of the Valuer General (2017). Councils may choose to base rates entirely on the land values of}

properties, which may have some specified minimum amount payable, or they may charge a fixed component combined with a rate on land value. While this choice may have an effect on equity, it would appear to have little effect on efficiency.

58 _{Table 1 New South Wales Local Government General Operating Statement, Government Finances Statics,}

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are derived from residential rates, with rates on business and farmland accounting for 25 per cent and 7 per cent of aggregate collections, respectively. The remaining 3 per cent were classified as other rate sources. In VURMTAX, we distribute other rate sources across business, farmland and residential according to their identified collection shares in Page (2011). Thus, NSW derived 67 per cent of aggregate council rate collections from residential properties, with 26 per cent and 7 per cent derived from business and farmland, respectively.

We run two council rate simulations. In the first, to calculate the average excess burden, we cut the rate of council tax by 95%. In the second, to calculate the marginal excess burden, we raise the rate by an amount sufficient to raise an additional $100 m. of revenue. The macroeconomic and industrial effects of these tax changes are reported in Table 11-1 and Table 11-2. Below, we focus our discussion on the results from removing the tax, i.e., we cut the rate of council tax on UIV in NSW by 95%. Because the two simulations differ only in terms of direction and magnitude, but not in nature, our discussion of the results for the average excess burden simulation is generalizable to the results of the marginal excess burden simulation.

11.3 Macroeconomic impacts

As discussed in section 5, the excess burden of land tax can be largely traced to the allocative efficiency distortion arising from the exempt status of land used in the supply of owner- occupied dwelling services. Council rates do not generate this distortion because they are applied to land used in both rented and owner-occupied dwelling service provision (see section 11.1). This causes the council rates SEDI and excess burden measures to be lower than those of land taxes (see Table 2-1). Indeed, both the SEDI and excess burden of council rates on UIV are not only lower than that of land tax: they are negative. Without the allocative distortion introduced by the land tax exemption of owner-occupied land, we are left in the council rates simulation with only the gain arising from part of the tax incidence falling on foreign land owners. Put another way, both land tax and council rates are paid in part by foreign landowners. Ceteris paribus, this pushes the values of the excess burden measures for these taxes towards negative. However, by exempting owner-occupied dwellings, land tax creates an allocative efficiency distortion that more than offsets the gains from taxing foreign owned land, resulting in a net positive excess burden measure.

The macroeconomic consequences of council rates’ negative excess burden is apparent in Table 11-1, where we find in rows 15 and 16 of column (2) that removal of council rates causes negative deviations in long-run private and public consumption spending. The incidence of

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council rates falls on landowners. When council rates are reduced or eliminated, national income falls because part of the council rates are being paid by foreign landowners (row 20). In VURMTAX, national private and public consumption spending is indexed to national income. Hence, the negative deviation in national income generated by reduced council rates revenue from foreign landowners causes a negative deviation in private and public consumption spending. Removal of the tax has little effect on real GDP (row 14); hence, the negative deviation in private and public consumption causes the real balance of trade to move towards surplus (rows 18 and 19). The resulting positive deviation in export volumes (row 18) causes a negative deviation in the terms of trade (row 26). This also contributes to the negative deviation in national income (row 20). The positive deviation in the real balance of trade encourages expansion of capital-intensive export and import competing sectors. At the macroeconomic level, this is reflected in small positive deviations in aggregate capital stock (row 21) and real investment (row 17).

We turn now to the macroeconomic outcomes for NSW. The loss of council rate revenue from foreign and interstate owners of land, and the resulting rise in lump-sum taxation of NSW households, generates negative deviations in private and public consumption spending in NSW (rows 6 and 7 of column (2)). It also generates a reduction in population and employment in NSW (row 4) because, as discussed in Section 3.1, net interstate immigration to NSW falls in response to the fall in NSW household post-tax real incomes. With real wages in NSW largely tied-down by the condition that households move between regions to gradually equalise real post-tax per capita wages, and with long-run rates of return on capital in NSW largely tied- down by the process of investment responding to movements in rates of return, there is little change in the long-run NSW ratio of capital rental prices to wage rates. Hence, there is little impetus for a long-run change in the NSW labour / capital ratio. Hence, with long-run NSW employment lower because of the higher long-run lump sum tax load on NSW households, NSW capital is also below baseline in the long-run (row 2). With NSW employment and capital below baseline in the long-run, so too is NSW real GSP (row 5).

11.4 Industry impacts

Table 11-2 reports the sectoral consequences of changing NSW council rates. As discussed above, the main macroeconomic effect of removing NSW council rates is to reduce private and public consumption spending and increase net foreign exports. These macroeconomic outcomes are reflected in the pattern of sectoral impacts reported in Table 11-2. Three sectors

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experience expansions in activity: agriculture, forestry and fishing; manufacturing; and mining. These sectors produce traded goods (that is, they have a heavy orientation towards production of goods that are exported or compete with imports in the local Australian market). Hence, they are among the beneficiaries, in terms of output expansion, of the movement towards surplus in Australia’s balance of trade. Provision of trade-facilitating margin services is an important activity of the transport, postal and warehousing sector. Hence, output of this sector is broadly in line with baseline, because of the aforementioned movement towards surplus in the balance of trade.

Consistent with the primary first round impact of the removal of NSW council rates being a reduction in private and public consumption spending, the sectors most adversely affected are producers of consumption goods. This accounts for the negative output deviations of accommodation and food services; health care and social assistance; other services; retail trade; education and training; public administration and safety; and dwelling services. The remaining sectors (construction; wholesale trade; financial and insurance services; business services; information media and communications services; electricity, gas, water, and waste services) are characterised by being important producers of intermediate or capital inputs (thus rendering the magnitudes of their output deviations similar to that of the NSW real GSP deviation) or, like the utilities sector, have a low expenditure elasticity (thus insulating their output from the decline in real consumption spending).

11.5 Conclusions

Part of the incidence of council rates falls on foreign landowners. Hence, a cut to council rates reduces national income. This requires national consumption to fall and net exports to rise. At the sectoral level, this buoys output of industries in the traded goods sector, but damps output of industries producing goods for private and public consumption. At the NSW level, because of the loss of tax revenue on foreign landowners, the tax mix switch described by a reduction in council rates and increase in lump sum taxation represents a net increase in the tax burden on NSW households. The result is a reduction in net interstate emigration to NSW. This causes the long-run size of the NSW economy to contract.

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11.6 Tables

Table 11-1: State and national level macroeconomic impacts in 2040, due to a A$100m rise in council rate revenue or removal of council rates in NSW

Council rate (UIV) rise Macroeconomic impacts % deviation from baseline (unless otherwise indicated),

2040

Council rates (UIV) removed Macroeconomic impacts % deviation from baseline (unless otherwise indicated),

2040

(a) NSW state-level results

1 Price deflator, GSP 0.002 -0.065

2 Capital stock (rental weights) 0.004 -0.182

3 Real investment 0.005 -0.221

4 Employment 0.004 -0.168

5 Real GSP 0.004 -0.189

6 Real private consumption 0.009 -0.378

7 Real public (state) consumption 0.009 -0.378

8 Imports, volume 0.005 -0.234

9 Exports, volume -0.004 0.143

10 Real post-tax consumer wage 0.001 -0.020

11 Real producer wage -0.001 0.025

12 Tax base ($m) -158.3 6736.63

13 Aggregate tax revenue ($m) 172.090 -7321.160

(b) National results

14 Real GDP 0.000 -0.012

15 Real private consumption 0.001 -0.036

16 Real public (state and federal) consumption 0.001 -0.023

17 Real investment 0.000 -0.002

18 Real exports -0.001 0.028

19 Real imports 0.001 -0.039

20 Real GNI 0.001 -0.025

21 Capital stock (rental weights) 0.000 -0.005

22 Employment 0.000 -0.005

23 Capital rentals (investment-price deflated) 0.000 0.001

24 Real post-tax consumer wage 0.000 -0.009

25 Real producer wage 0.000 -0.006

26 Terms of trade 0.000 -0.009

27 Price deflator, consumption (CPI) 0 0

28 Price deflator, GDP 0.000 -0.003

29 Tax base (all states and federal, $m) -164.13 6998.27

30 Aggregate tax revenue (all states and _{federal, $m)} 155.990 -6619.123

(c) Change expressed as percent of GDP

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or removal of council rates in NSW Council rate (UIV) rise

Effects on real industry output % deviation from

baseline, 2040

Council rates (UIV) removed Effects on real industry output % deviation from

baseline, 2040

1 Agriculture, forestry and fishing 0.00 0.04

2 Mining 0.00 0.19

3 Manufacturing 0.00 0.01

4 Electricity, gas, water and waste _services 0.00 -0.10

5 Construction 0.00 -0.20

6 Wholesale trade 0.00 -0.19

7 Retail trade 0.01 -0.27

8 Accommodation and food services 0.01 -0.35

9 Transport, postal and warehousing 0.00 -0.03

10 Information media and communications 0.00 -0.12

11 Financial and insurance services 0.00 -0.12

12 Dwelling ownership 0.01 -0.24

13 Business services 0.00 -0.11

14 Public administration and safety 0.00 -0.17

15 Education and training 0.01 -0.25

16 Health care and social assistance 0.01 -0.30

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12

Personal Income Tax

This section focuses on the impacts of Australia’s personal income tax. While traditional CGE models distinguish federal taxes as indirect taxes and tariffs, or factor income taxes, e.g., capital taxes or labour taxes, VURMTAX models personal income tax as a tax on labour, capital and land income that accrues to local residents. While we recognise that Australia’s personal income tax system is progressive, in this paper we take VURMTAX’s assumption of a representative household and model the personal income tax as a flat-rate tax on taxable household income. We do not capture impacts such as heterogenous labour supply responses, e.g., due to differing labour supply elasticities across the income spectrum and by gender, or the progressive nature of the income tax rate scale. This biases our estimate of the marginal excess burden downwards.

In what follows, we briefly summarise the tax base and means by which franking credits are accounted for in our modelling in section, before summarising the data, equation system and assumptions used to model Australia’s personal income tax system in VURMTAX.