CoPS/IMPACT Working Paper Number G-287

Title: A Dynamic Economy-wide Analysis of Company Tax Cuts in Australia

Authors: Janine M. Dixon and Jason Nassios


We provide a comprehensive analysis of the economy-wide implications of company tax cuts in Australia. This is achieved using VURMTAX, a bottom-up, multi-regional computable general equilibrium (CGE) model of Australia's states and territories with detailed fiscal accounts. We find that a five percentage point reduction in Australia's legislated rate of company tax stimulates growth in investment, real GDP, and real consumer wages. However, real national income and household consumption both fall when the company tax rate is cut, diminishing economic welfare. As we show, this finding is insensitive to: (i) changes in the timing of the tax cuts, i.e., an overnight cut drives similar long-run impacts to staged reductions, or (ii) whether investors form views on expected rates of return on capital via adaptive or forward-looking expectations. The marginal excess burden (MEB) for company tax is therefore negative. This finding contradicts previous studies, which derive a large, positive MEB for company tax. We identify six differences between modelling assumptions applied herein, and those used in a previous study for Australia (Cao et al. 2015). As we show, these six factors explain 84 per cent of the difference between MEB estimates derived from VURMTAX and Cao et al.

JEL classification: C68, E62, H21, H25

Keywords: Taxation policy; CGE modelling; Dynamics; Excess burden

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