Because company tax is levied by the federal government, we do not report state-level results herein. In line with the approach outlined in section 3.5, we use equation (3.5) to calculate the national excess burden from two experiments:
1. A small rise in Australia’s company tax rate that yields A$100m in revenue, which yields the marginal excess burden of the tax;
2. Removal of Australia’s company tax, which yields the average excess burden.
Table 13-1 summarises our results, which are both negative and therefore in line with previous studies of the impact of a cut to the Australian company tax rate by Dixon and Nassios (2016). We find the marginal excess burden is -27 cents per dollar of net revenue in the long-run, which herein is defined as being twenty-one years post the initial tax policy shock. The average excess burden is -32 cents per dollar of net revenue.
Focusing on the average excess burden result herein for simplicity, under the (dynamic) simulation framework applied in VURMTAX we capture the up-front transfer to foreign investors caused by elimination of Australia’s company tax. Because existing foreign investors willingly invested at the post-tax rate of return on investment offered in Australia at the current company tax rate of 30 cents per dollar of net profit, eliminating company tax delivers those investors a windfall gain. This reduces long-run GNI and thus national welfare, which materialises via a negative average excess burden. This result conflicts with several other analyses of Australia’s corporate tax system, in particular those by Cao et al. (2015) and Murphy (2016). To highlight the key points of difference between these analyses, we provide an attribution analysis of our findings relative to the long-run comparative static CGE analysis by Cao et al. (2015). Our attribution analysis is reported in section 13.7. As we shall show, capturing the up-front foreign transfer that arises when company tax rates are altered materially impacts the overall excess burden estimate; this transfer is not captured by long-run comparative static CGE analyses. With no notion of a time-transition path in comparative static analyses, there is no scope to model the impact of upfront foreign windfall gains on economic welfare. As we shall discuss, a long-run comparative static analysis of a company tax cut can therefore be thought of as a dynamic analysis, under an assumption that any changes in the tax rate on capital income are grandfathered.
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Prior to providing our attribution study, we give a brief discussion of the macroeconomic and industry impacts of a small rise in Australia’s corporate tax rate, and removal of Australian company tax. We then consider the impact of the Federal Government’s proposed 5 percentage point cut to Australia’s company tax rate.
13.4 Macroeconomic impacts
The long-run (2034, fifteen years post-tax policy shock) macroeconomic impacts of a (i) small rise in the company tax rate that yields an A$100m increase in tax-specific collections; and (ii) removal of company tax, are summarised in column [1] and column [2] of Table 13-2. State results are given in Table 13-2(a), while national results are provided in Table 13-2(b) and (c). As in previous chapters, we study the impact of removing the tax, i.e., the outputs in column [2]. While the direction and magnitude of the simulation results for any given variable differ, the relative impacts on the variables are similar between the two simulations. Hence, an explanation of results for one column serves as an explanation of results for the other column.
Focusing on the national results in Table 13-2(b), removing a tax on capital increases the post- tax rate of return on capital in the short-run. This stimulates short-run investment and strong growth in the capital stock in the long-run (+3.68 per cent, see row 21 in column [2] of Table 13-2(b)), which increases the capital/output ratio (real GDP grows by 1.3 per cent from column [2] in Table 13-2(b), which trails the growth in the national capital stock). With capital stocks increasing, the capital-to-labour ratio also increases, which drives real wage growth (+2.28 per cent in row 24 of column [2] in Table 13-2(b)). Capital rentals also fall in the long-run (-4.70 per cent in row 23 of column [2] in Table 13-2(b)), because of the elevated capital/labour ratio. In contrast, elevated capital/labour ratios drive real consumer wages up relative to baseline in the long-run, which drives an increase in labour force participation and an expansion in long- run labour supply and employment (+0.29 per cent in row 22 of column [2] in Table 13-2(b)).
The results presented thus far are uncontroversial: real GDP, the capital stock and employment all rise, with wages also above baseline. Critically though, because of Australia’s dividend imputation system, the post-tax rate of return on investment by locals is largely governed by the personal income tax rate63. The investment stimulus is thus largely financed by the foreigner, for whom the company tax cut increases the post-tax rate of return irrespective of
63 This is particularly true for companies that operate domestically and thus pay Australian company tax, which is distributed as a franking credit when dividends are paid.
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whether distributions are franked or unfranked. With an increase in foreign ownership of capital, the foreign capital income account moves towards deficit. This drives the income account balance towards deficit, which drives real gross national income (GNI) down in both absolute terms, and relative to GDP (-0.442 per cent in row 20 of column [2] in Table 13-2(b)). Thus, public and private consumption fall relative to baseline when we cut the corporate income tax rate (-1.67 per cent and -1.62 per cent in row 16 and row 15 of column [2] in Table 13-2(b), respectively).
Because we require net foreign liabilities to stabilise relative to GDP in the long-run, the trade account balance is required to move towards surplus: this drives an increase in long-run exports (+8.6 per cent in row 18 of column [2] in Table 13-2(b)) relative to imports (-0.498 per cent in row 19 of column [2] in Table 13-2(b)). This requires real devaluation, which sees the terms of trade fall relative to baseline (-2.13 per cent in row 26 of column [2] in Table 13-2(b)).
13.5 Industry impacts
Table 13-3 shows results for output in the ANZSIC-level 1 industries in NSW. The table is structured in a similar way to Table 13-2; column [1] and column [2] summarise the impacts of a A$100m rise in company tax collections or removal of company tax. Real devaluation and an increase in the economy-wide capital-labour ratio favours export-oriented, capital intensive industries. It is therefore unsurprising to see the Mining industry as a key beneficiary of elimination of company tax, with its output in NSW increasing by 8.35 per cent relative to baseline.
Transport, Public sector, Wholesale trade, Business services and Manufacturing all show positive effects, because NSW GSP is elevated relative to baseline.
Elsewhere, industries with higher degrees of foreign ownership expand relative to industries with little or no foreign ownership. As a result, industries that are assumed to be domestically owned, e.g., education and dwelling services, experience little or no output expansion in NSW, because local investors do not benefit from the company tax cut. Labour-intensive industries also suffer; this is because wages rise, which increases the cost of a key primary factor of production. This damages sectors such as Accommodation and food, whose output contracts by 2.5 per cent. Sectors that service the government (such as public administration) or households (such as Health care and social assistance, retail trade and other services) experience reductions in output, because national income falls relative to baseline, driving real public and private consumption down. Despite strong growth in exports, export-oriented industries such
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as Agriculture, forestry and fishing experience muted expansion (+0.63 per cent), because this industry is intensive in the use of a fixed factor (land) and labour, and is therefore impacted by the rise in wages.
Our analysis points to significant dispersion of industry outcomes when company tax rates are cut in Australia. This impact is pronounced, particularly relative to other taxes studied herein. Company tax cuts may therefore generate greater adjustment costs than other taxes, and the cost of this compositional change in output may be an important metric with which to gauge the impact of company tax cuts. This may mean that workers are obliged to retrain or relocate.
13.6 Illustrative dynamic results: Reducing the company tax rate in Australia by 5