Tax cuts & economic growth

Published in The Australian Financial Review on 17 October 2019 under the title “Tax is the first lever the government can pull for growth”. Written in my capacity as Research Associate at the Centre for Independent Studies.

The Australian economy has stalled. According to the most recent national accounts, Australia’s GDP per person has not increased over the past year, and the IMF predicts the stagnation will continue in the short term.

This gloomy news has led to the inevitable calls for more monetary and fiscal stimulus. But these are the wrong ideas at the wrong time.

There may be a time and place for stimulus policy. Specifically, if there is a sudden shock that decreases aggregate demand, then stimulus policies can potentially improve the situation by boosting consumption spending. But these macroeconomic tools are blunt instruments designed to create a short-term boost during an emergency — and they do nothing to improve long-term productivity.

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Jumpstart Productivity

Humphreys, J. (2019), Jumpstart Productivity: New modelling pinpoints better tax cut program, CIS Policy Paper 24, Centre for Independent Studies, Sydney.

Treasury modelling of the government’s tax changes make the strange assumption of no behavioural change, leading them to ignore economic efficiency and overestimate the revenue implications. Proper modelling provides crucial further information:

  1. The Low-Middle Income Tax Offset (LMITO) does nothing to improve economic efficiency and will cost about 10% more than expected.
  2. The long-term structural tax reforms scheduled for 2022 and 2024 create significant economic benefits, boosting GDP by about $36 billion/year and increasing efficiency by $13 billion/year – this is over and above the direct financial benefits received by taxpayers.
  3. Treasury estimated the structural reforms would cost about $235 billion over ten years, but proper tax modelling shows the true cost is 38% less at only $145 billion over ten years.
  4. Scrapping the LMITO and bringing forward the structural tax reforms would give large benefits at a relatively low cost; it would be possible to do this while keeping the budget in surplus.
  5. Looking beyond the details of the current tax changes, it is crucial that the Australian Treasury copy the lead of the UK Treasury by introducing dynamic tax modelling before they provide tax advice or forecasts.

Budget response 2019

Humphreys, J. (2019), Budget 2019: Why the long-term tax cuts should be fast-tracked, CIS Policy Paper 19, Centre for Independent Studies, Sydney.

The centrepiece of the 2019/20 budget was a proposed doubling of the income tax cuts that were legislated last year. Both the short-run LMITO change and the long-run tax cuts will reduce tax, but the two approaches are fundamentally different.

These differences are important, but they are hidden by the superficial nature of the tax debate in Australia. To differentiate between superficial tax changes and meaningful tax reform, it is necessary to understand the link between taxes, incentives, and behaviour.

We have used a dynamic tax model that factors in behavioural changes. This model applies an elasticity of taxable income to estimate the direct link between tax rates and the tax base, which allows for more accurate estimates of revenue changes, the efficiency cost (deadweight loss) from tax, economic output, and consumer wellbeing.

Review of 2014 QLD budget

Published in The Conversation on 4 June 2014 under the title “Queensland budget another case of the disappearing surplus”.

With the release of a plan to sell and lease $33 billion worth of assets after the next election, the state government has shifted attention away from its budget. Though in truth, it would have been quite easy to distract people from this budget, because there is nothing new.

We already knew that the ever-elusive budget surplus had disappeared. Two years ago I commented in The Conversation that: “The forecast for a fiscal surplus in 2014/15 is nice, but it is hard to take long-term budget predictions too seriously” and also that “it is easy to predict future austerity and surpluses, but it is harder to actually make it happen”. Time has justified that scepticism. The government’s original estimate for 2014/15 was a A$0.7 billion surplus, but it is now expecting a A$2.3 billion deficit.

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Alternative to the minimum wage

Published in The Drum ABC Online on 10 June 2013 under the title “Minimum wage is bad social policy”, with an opening blurb of “There are more efficient, equitable and transparent systems for fighting poverty than implementing a minimum wage”.

Imagine a free-market economy with no government welfare. Some people earn high incomes and others earn low incomes. Now consider that some kind-hearted bureaucrats come along and want to introduce a government policy to help the low-income earners. How should they do it? Let’s consider two options.

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