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CGE Analysis of the Current Australian Tax System

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CGE Analysis of the Current Australian Tax System KPMG Econtech CGE Analysis of the Current Australian Tax System Final Report 26 March 2010 ABCD Department of the Treasury The Excess Burden of Australian Taxes March 2010 Inherent Limitations This report has been prepared as outlined in the Engagement Letter from KPMG Econtech to Commonwealth Treasury dated 6 February 2009. The services provided in connection with this engagement comprise an advisory engagement which is not subject to Australian Auditing Standards or Australian Standards on Review or Assurance Engagements, and consequently no opinions or conclusions intended to convey assurance have been expressed. No warranty of completeness, accuracy or reliability is given in relation to the statements and representations made by, and the information and documentation provided by Commonwealth Treasury as part of the process. KPMG Econtech have indicated within this report the sources of the information provided. We have not sought to independently verify those sources unless otherwise noted within the report. KPMG Econtech is under no obligation in any circumstance to update this report, in either oral or written form, for events occurring after the report has been issued in final form. The findings in this report are subject to unavoidable statistical variation. While all care has been taken to ensure that the statistical variation is kept to a minimum, care should be taken whenever using this information. This report only takes into account information available to KPMG Econtech up to the date of this report and so its findings may be affected by new information. Should you require clarification of any material, please contact us. The findings in this report have been formed on the above basis. Third Party Reliance This report is solely for the purpose set out in contract and is for Commonwealth Treasury’s information. This report has been prepared at the request of Commonwealth Treasury in accordance with the terms of KPMG Econtech’s Engagement letter dated 6 February 2009. Other than our responsibility to Commonwealth Treasury, neither KPMG Econtech nor any member or employee of KPMG Econtech undertakes responsibility arising in any way from reliance placed by a third party on this report. Any reliance placed is that party’s sole responsibility. Forecasting Disclaimer In the course of our work, projections have been prepared on the basis of assumptions and methodology which have been described in our report. It is possible that some of the assumptions underlying our projections may not materialise. Nevertheless, we have applied our professional judgement in making these assumptions, such that they constitute an understandable basis for estimates and projections. Beyond this, to the extent that certain assumptions do not materialise, then you will appreciate that our estimates and projections of achievable results will vary. i © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation. CONTENTS Executive Summary 1 1 Introduction 11 1.1 Overview of the Australian Tax System 12 1.2 The Structure of this Report 13 2 Key Literature 14 3 The Cost and Incidence of Taxes 17 3.1 The Excess Burden of Taxation 18 3.2 Using MM900 to Estimate the Excess Burden of Australian Taxes 20 3.3 The Incidence of Taxes 22 3.4 Using MM900 to Estimate the Incidence of Australian Taxes 24 4 The MM900 Model 28 4.1 Over-arching Assumptions 29 4.2 Households 31 4.2.1 Labour Supply versus Leisure 31 4.2.2 Consumption versus Saving 32 4.2.3 Pattern of Consumption 32 4.3 Producers 33 4.3.1 Low and High Skilled Labour 33 4.3.2 Structures and Other Capital 34 4.3.3 Land 35 4.3.4 Natural Resources and Other Generators of Economic Rents 35 4.4 Government Sector 37 4.5 Foreign Sector 38 5 Results 40 5.1 Summary of Excess Burden Results 44 5.2 Summary of Incidence Results 47 5.3 Detailed results 51 5.3.1 Petroleum Resource Rent Tax 51 5.3.2 Land tax and Municipal rates 52 5.3.3 Company Income Tax 54 5.3.4 Resource Royalties and Crude Oil Excise 58 5.3.5 Labour income tax 59 5.3.6 Payroll tax 62 5.3.7 GST 65 5.3.8 Tobacco Excise 68 5.3.9 Alcohol taxes 69 5.3.10 Import duties 71 5.3.11 Luxury Car Tax 72 5.3.12 Fuel excise 73 5.3.13 Motor Vehicle taxes 74 5.3.14 Conveyancing duties 77 5.3.15 Stamp duties other than real property 79 © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent ii member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation. 5.3.16 Insurance taxes 80 5.3.17 Gambling taxes 81 6 References 83 Appendix A – Detailed Methodology by Individual Tax 85 A.1 Petroleum Resource Rent Tax 85 A.2 Land Taxes and Municipal Rates 87 A.3 Company Income Tax 90 A.4 Crude Oil Excise and Resource Royalties 95 A.5 Labour income tax 97 A.6 Payroll tax 105 A.7 GST 107 A.8 Tobacco Excise 109 A.9 Alcohol Taxes 111 A.10 Import Duties 114 A.11 Luxury Car Tax 115 A.12 Fuel Excise 119 A.13 Motor Vehicle Taxes 121 A.14 Conveyancing Stamp Duties 124 A.15 Stamp Duties Other than on Real Property 127 A.16 Insurance Taxes 129 A.17 Gambling Taxes 131 Appendix B – Modelling Taxes with Partial Coverage 133 Appendix C – Industry Impacts 134 Appendix D – MM900 Parameters 137 © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent iii member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation. Department of the Treasury ABCD The Excess Burden of Australian Taxes March 2010 Executive Summary Background In May 2008, the Treasurer announced an extensive review into Australia’s tax and transfer system (the Henry Review). Governments aim to raise tax revenue in a way that meets their funding needs, while paying regard to the three principles of good tax design: • simplicity (keeping administration and compliance costs low); • equity (or fairness, which is partly a subjective judgement); and • economic efficiency. KPMG Econtech was commissioned to model the existing tax system against the third aim of economic efficiency, although the modelling also provides some insights into equity. Most taxes result in losses of economic efficiency by distorting economic behaviour. For example, most taxes reduce incentives to work or invest, or distort consumption patterns. This leads to losses in consumer welfare that can be compared to the amount of revenue that is being raised. An efficient tax system relies on taxes that result in relatively low losses in consumer welfare per dollar of revenue raised (excess burden). With this in mind, the Treasury commissioned KPMG Econtech to undertake a rigorous economic analysis of the economic costs of the Australian tax system. For this, KPMG Econtech has estimated the economic inefficiencies, or the excess burdens, that arise from Australia’s major federal, state and local taxes. This report also examines the economic incidence of each tax, or how the final burden is shared between various sources of real income (labour, capital, land rents and other economic rents). The results for each tax have been estimated using KPMG Econtech’s computable general equilibrium (CGE) model, MM900. MM900 has been constructed by further developing our existing MM600 model specifically for this study. MM900 goes well beyond previous Australian modelling in capturing the economic effects of the tax system on the Australian economy. It distinguishes 19 different major taxes at the Federal, State and Local levels. For each tax, it identifies the true tax base as closely as possible, and aims to capture the main behavioural responses to the tax’s imposition. The modelling also allows for certain negative externalities in consumption that may justify certain specific taxes. MM900 contains a fine level of detail. For example, in MM900 the economy produces 889 different products, which represents eight times as much product detail as other comparable models. This allows the model to more accurately capture the application of certain product- based taxes. For example, MM900 treats beer, wine and spirits as separate substitutable products within one broad group. Less disaggregated models aggregate all alcohol products together, and therefore miss the excess burdens that arise from taxing closely substitutable alcoholic beverages at different rates. Another example of the fine level of detail in MM900 is that each of the 109 industries uses up to six different primary factors (or types of labour, capital and fixed factors). The different fixed factors include land and natural resources, allowing for much more robust modelling of the effects of taxes based on the value of land or the value of natural resource use. 1 © 2010 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. The KPMG logo and name are trademarks of KPMG. Liability limited by a scheme approved under Professional Standards Legislation. Department of the Treasury ABCD The Excess Burden of Australian Taxes March 2010 In addition, in comparison to earlier studies, this analysis incorporates a more comprehensive analysis of the behavioural responses to each tax.
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