Daily BulletinHoliday Centre

The Conversation

  • Written by The Conversation Contributor

The government has released Treasury modelling showing a tax mix switch with a 15% GST and income tax cuts would deliver no gains to economic growth.

The modelling has been put out to back up Prime Minister Malcolm Turnbull’s decision to walk away from the GST change on the grounds that the option, as he told the Coalition party room on Tuesday, “does not offer the economic benefits that many have assumed”.

As a result of the modelling the government has refocused its work on its tax package towards other options.

The modelling, presented in a January 25 Treasury ministerial brief, assumed an increase in the GST from 10% to 15%, and broadening its base to include water and sewerage. This would raise $35 billion. It further assumed $6 billion in assistance to households automatically generated from indexed pension payments, leaving the rest for income tax cuts.

The higher GST rate would cut 1.2% off GDP, and the automatic CPI indexation of transfer payments and grants would slice off another 0.1%, according to the modelling. The modest base broadening to water and sewerage would add 0.07%, while the income tax cuts would add 1.3%. This left a bottom line of no addition to GDP.

The assumption in the modelling about compensation is minimalist – further measures would be needed in practice to compensate low income earners, which would mean less funds available for income tax cuts.

The government tested the Treasury modelling against that from two private sector firms – Independent Economics and KPMG. They came up with tiny increases to GDP from such a package.

Independent Economics estimated 0.18% gain to GDP in the long term, while KPMG’s estimate was 0.3% gain.

The brief says: “The estimates from the scenario testing are, of course, indicative and may change with further refinement.

“That said, they are all pointing to a small increase in GDP over time from personal income tax reductions that are funded largely by a GST hike. In essence, the models all suggest they are largely offsetting.”

The brief notes that the impact would be greater the more personal income tax cuts were combined with corporate income tax cuts – but the government could not, in political terms, skew its tax cuts to the corporate sector.

“The case [for a tax mix switch] will need to be made forcefully using broader arguments. These include the impetus to entrepreneurial behaviour, international competitiveness and reducing incentives to channel personal income into company and other structures,” the brief says.

Treasury also provided a brief on the economic and fiscal effects of rising average tax rates (bracket creep).

Dated February 1, it says that by the end of the forward estimates, about half of the fiscal consolidation relies on increases in average tax rates due to the tax scales not being indexed.

The average personal income tax rate is set to be 24.4% in 2016-17, rising to 26.6% by 2020-21.

Treasury has modelled the economic cost of allowing average tax rates to rise over the forward estimates period.

It shows that achieving a deficit reduction through an increase in the average tax rate, compared with a strategy of maintaining a constant average tax rate and cutting government spending, leads to a 0.35% contraction in GDP in the long term.

The long term economic cost of the increase in average tax rates (0.55% of GDP) is only partly offset by the lift in economic activity from government spending (0.2% of GDP).

The brief cautions that this modelling is indicative at best but says “it does illustrate the economic cost of relying on bracket creep, rather than spending cuts to close the budget deficit”.

“The economic cost of rising average tax rates is large (0.55% of GDP) because it creates distortions in all sectors of the economy. The economic distortion from all taxes increases as personal income tax rates rise.”

Industry Minister Christopher Pyne told Parliament on Thursday “there won’t be a [higher] goods and services tax”.

Authors: The Conversation Contributor

Read more http://theconversation.com/treasury-modelling-shows-no-growth-lift-from-gst-tax-mix-switch-54574


The Conversation


Scott Morrison Virus Announcement

PRIME MINISTER: Good afternoon. Keeping Australians safe - that is the priority of our Government as we deal with what has been an emerging situation with the coronavirus. Each and every day there a...

Scott Morrison - avatar Scott Morrison

Closing the Gap Statement to Parliament

Mr Speaker, when we meet in this place, we are on Ngunnawal country. I give my thanks and pay my respects to our Ngunnawal elders, past, present and importantly emerging for our future. I honour...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Alan Jones

ALAN JONES: Prime Minister, good morning.    PRIME MINISTER: Good morning, Alan.    JONES: I was just thinking last night when we're going to talk to you today, you must feel as though you've ...

News Company - avatar News Company

Business News

Having a mentor is a must to take your business to the next level

Kerstyn Walsh will have the chance to meet her business mentor, LA-based wedding planner to the stars, Lisa Vorce, which will be game-changing for growing Kerstyn’s business Kerstyn Walsh, a self-emp...

Media Release - avatar Media Release

Is Hiring a Corporate Lawyer for Your Company Necessary?

Alternative online legal services like LegalZoom, Incfile, and Rocket Lawyer provides young and budding entrepreneurs access to legal help at a much affordable price without having to hire or meet a l...

Joe Curmi - avatar Joe Curmi

Top 5 Green Marketing Ideas for Your Eco-Friendly Small Business

According to studies, about 33 percent of consumers prefer buying from brands that care about their impact on the environment. This is good news for anyone running an eco-friendly business. It’s a...

Diana Smith - avatar Diana Smith


Travelling With Pets? Here Is What You Should Know

Only a pet parent can understand the dilemma one experiences while planning a vacation. Do you leave your pets at home?  Will you get a pet sitter or someone to take care of them while you are away?...

News Company - avatar News Company

How to Be a Smart Frugal Traveller

You are looking through Instagram, watching story after story of your followers overseas at a beach in Santorini, walking through the piazza in Italy, and eating a baguette in front of the Eiffel ...

News Company - avatar News Company


Graduation is the stage of life when a student receives the rewards of hard work of years. It must have taken sleepless nights and tiring days to achieve the task. Now, as you have received your cov...

News Company - avatar News Company