For two consecutive years, the government has successfully passed tax cut legislation. These tax policies sparked a wide-ranging political debate, but unfortunately it was not informed by proper public tax modelling to show the likely impact of the reforms. This paper fills that gap by using a dynamic tax model and the most recent public tax data in order to determine the likely impact on GDP, economic efficiency, and government revenue.
Some of the findings of this report conform to mainstream expectations. As most economists would predict, the structural tax reforms introduced by the government are expected to improve economic output and efficiency. However, the details of this report suggest the government should consider adding a third stage to their tax reform agenda.
The next stage of the government’s tax policy should involve scrapping the Low-Middle Income Tax Offset (LMITO), and instead bringing forward the scheduled structural tax reforms so they begin in 2020. The modelling in this report shows that the LMITO fails to increase efficiency, while the future structural tax cuts produce higher benefits than previously understood — which makes them both more desirable and also more affordable than previously believed.
The final conclusion from this report is the urgent need for the government to conduct dynamic tax modelling as a fundamental part of their tax analysis process; following the commendable lead taken by the UK Treasury. Good policy requires good information, and there is no credible reason for ignoring bestpractice tax modelling.
- The Low-Middle Income Tax Offset (LMITO) does nothing to improve economic efficiency and will cost about 10% more than expected.
- 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.
- 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.
- 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.
- 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.