The effects on consumer welfare of a corporate tax cut

Author name: 
Chris Murphy

This paper analyses in two ways the effects of an Australian Government proposal to reduce the corporate tax rate from 30 to 25 per cent. Murphy (2016a) modelled the proposal for the Australian Treasury using CGETAX (Murphy, 2016b), a large-scale, long-run CGE model designed for tax policy analysis. The gain in the real wage is estimated at 1.0 per cent. Depending on how the company tax cut is funded, the net gain in annual consumer welfare is between $4.1 billion and $5.2 billion in 2015/16 terms and the associated gain in real GDP is from 0.7 to 0.9 per cent. This paper also uses a highly stylised version of CGETAX to provide a theoretical analysis of the proposed tax cut, applicable to advanced, open economies in general. Echoing CGETAX including by allowing for imperfect competition, the Stylised model shows an increase in the capital-labour ratio from the reduction in the cost of capital, an increase in the labour supply induced by a higher real wage when the tax cut is passed on from internationally mobile capital to labour, and a reduction in the incentive to shift profits to lower-taxed jurisdictions (de Mooij and Devereux (2009)). This paper also discusses the likely timing on the introduction of the tax cut and the economic responses to it.

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