CoPS/IMPACT Working Paper Number G-260

Title: Modelling the Impacts of a Cut to Company Tax in Australia

Authors: J.M. Dixon and J. Nassios


We investigate the impact of a cut to the company tax rate using a miniature version of the Vic-Uni computable general equilibrium model of the Australian economy with additional detail on ownership of physical capital. Because of Australia's system of dividend imputation, a change to the company tax rate only affects the final post-tax rate of return for foreign investors. Therefore a cut to the company tax rate would transfer government revenue to foreigners, and add to pressure on government to reduce spending or to raise personal taxes.

We concur with the Treasury's finding that a cut to the company tax rate would attract more foreign investment to Australia, making workers more productive and increasing wages and output. However, there is a lag between new investment activity and capital growth, and a large share of future company profits will accrue to foreign investors.

We also find that increased wages will reduce returns to domestically owned capital.

While the impact on national production, as measured by GDP, will be positive, this is not a suitable measure of national benefit. The right indicator of national benefit is the impact of a company tax rate cut on national income and we find that this will fall.

JEL classification: C53, C58, D58, E27, J23, O41

Keywords: Forecasting, CGE models, profit tax, labour markets

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