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The Economic Impact and Efficiency of State and Federal Taxes in Australia The Economic Impact and Efficiency of State and Federal Taxes in Australia CoPS Working Paper No. G-289, April 2019 Jason Nassios, John Madden, James Giesecke, Janine Dixon, Nhi Tran, Peter Dixon, Maureen Rimmer and Philip Adams Centre of Policy Studies, Victoria University And John Freebairn Ritchie Chair of Economics, University of Melbourne ISSN 1 031 9034 ISBN 978-1-921654-98-5 The Centre of Policy Studies (CoPS), incorporating the IMPACT project, is a research centre at Victoria University devoted to quantitative analysis of issues relevant to economic policy. Address: Centre of Policy Studies, Victoria University, PO Box 14428, Melbourne, Victoria, 8001 home page: www.vu.edu.au/CoPS/ email: [email protected] Telephone +61 3 9919 1877 The Economic Impact and Efficiency of State and Federal Taxes in Australia 1 2 2,3 4 1 2 J Nassios , JR Madden , JA Giesecke , JM Dixon , NH Tran , PB Dixon , MT Rimmer2, PD Adams2, JW Freebairn5 1Senior Research Fellow (CoPS), 2Professor (CoPS), 3Director (CoPS), 4Associate Professor (CoPS), 5Ritchie Professor (University of Melbourne). Please cite this work as: Nassios, J., J. R. Madden, J. A. Giesecke, J. M. Dixon, N. H. Tran, P. B. Dixon, M. T. Rimmer, P. D. Adams and J. W. Freebairn (2019). The economic impact and efficiency of state and federal taxes in Australia. CoPS/IMPACT Working Paper G-289. Available at https://www.copsmodels.com/elecpapr.htm Centre of Policy Studies Victoria University Level 14, 300 Flinders St Melbourne Victoria 3000 Telephone: +61 3 9919 1480 E-mail: [email protected] www.vu.edu.au/centre-of-policy-studies-cops Abstract The Henry Review of Australia’s Future Tax System (2009), made several recommendations to promote resilience, fairness, and prosperity via tax reform. Some of the key reforms suggested include a reduction in Australia’s federally-imposed corporate income tax rate from 30 to 25 per cent; and the removal of property transfer duties levied by state governments. The review by Henry et al. (2009) utilised a long-run, comparative static computable general equilibrium (CGE) model of the Australian economy to study the tax system. Implicit within this framework is a single layer of government. In reality, Australia’s state government levied tax rates differ across the eight states and territories; some, such as state land tax, health insurance and life insurance levies, are applied in a subset of states and territories only. A general lack of interstate coordination is evident in setting, developing and i reforming Australian tax policy. In this paper, we present a meticulous and detailed analysis of Australia’s state and federal tax system, using a bottom-up multi-regional CGE model of Australia’s states and territories, called VURMTAX. The general framework underlying VURMTAX is similar to the Monash multi-regional forecasting (MMRF) model and its successor VURM; see Adams et al. (2015). A state/local government agent therefore operates within each region, with an overarching federal government agent operating across all state and territories. VURMTAX differs from MMRF/VURM in several ways. For example, we include new theory to model the interaction between Australia’s corporate and personal tax system via full dividend imputation. This involves the introduction of two types of investment agents: foreign and local investors. In VURMTAX, the tax rate levied on corporate profits accruing to these two classes of investor differ, because only the domestic investor can claim franking credits. We also give careful consideration to industry-specific foreign capital ownership shares. This means the mining sector, for example, has a larger foreign capital ownership share than the economy-wide average in VURMTAX. We also modify the standard Klein-Rubin utility function that governs the consumption choices facing region-specific representative households in MMRF/VURM, to take account of important distortions in consumer choice caused by Australia’s tax system. More specifically, we model the impact of housing tenure choice distortions introduced by owner-occupied housing exemptions in state land taxes and personal income tax, using a nested CES framework. The elasticity of substitution between rented and owner-occupied housing is then calibrated based on findings from an appropriately specified discrete choice model of housing tenure choice. We also alter the standard household decision theory to properly account for the impact of property transfer duties on the demand for the bundle of goods typically consumed by households or businesses when moving house or factory/office. We call this bundle of goods moving services. These services include real estate services contracted to sell a house/buy a property, legal services contracted to prepare necessary transfer forms, and public administration services that are demanded to formally update title office documents. We also account for the impact of motor vehicle taxes on transport modal choice by households. As such, when the motor vehicle registration duty is increased in VURMTAX, we allow for direct modal substitution between, e.g, road passenger transport (taxis), and private transport. Among other theoretical developments, we account for the impact of jurisdiction-specific payroll tax thresholds in Australia on the output levels of monopolistically competitive firms, which yields insights into whether a reduction in payroll tax rates or a rise in payroll tax thresholds are more ii effective means of stimulating a regional economy. We also embed within VURMTAX a detailed equation system to account for Australia’s goods and services tax (GST). We apply this new theory to quantify: (i) the relative economic efficiency of unilateral state tax policy reforms in a single Australian state, New South Wales (NSW); (ii) the excess burden of Australia’s three main federally-imposed taxes; and (iii) the broader macroeconomic, state and industry impacts of federal tax policy, and unilateral state tax policy, reforms. Our assessment of the relative efficiency of NSW state and Australian federal taxes yields a set of marginal and average excess burdens, which are summarised and discussed. In total, we calculate excess burdens for nineteen major Australian taxes, of which sixteen are levied at the state/local government level. In addition to our study of the allocative efficiency impacts of the various state and federal taxes, detailed long-run (21 years post- reform) results are provided and described, to quantify the economic and industry effects of Australian tax policy reforms. With regard to state taxes, we find residential property transfer duties to be the most damaging of the state government levied taxes. More specifically, we derive a marginal excess burden for residential property transfer duties that exceeds 100 cents per dollar of revenue raised. Contrary to many past studies of Australia’s tax system, we also derive a negative marginal excess burden for company tax in Australia. We compare and contrast this result to past studies, and elucidate some key differences in parameter assumptions and modelling methodology that drive this result. JEL Classification: C68; E20; E62; H2. Keywords: Taxation policy; CGE modelling; Dynamics; Excess burden. iii iv Contents 1 Introduction ...................................................................................................................... 10 2 Summary .......................................................................................................................... 12 2.1 Summary of key results ............................................................................................. 16 2.1.1 Payroll taxes ....................................................................................................... 16 2.1.2 Land tax .............................................................................................................. 16 2.1.3 Transfer duties on property ................................................................................ 17 2.1.4 Insurance duties/levies ....................................................................................... 17 2.1.5 The current fire service levy (FSL) on insurers ................................................. 18 2.1.6 Motor vehicle taxes ............................................................................................ 19 2.1.7 Gambling taxes ................................................................................................... 19 2.1.8 Council rates ....................................................................................................... 20 2.1.9 National Taxes .................................................................................................... 20 2.1.10 Personal income tax ........................................................................................... 20 2.1.11 Company tax ...................................................................................................... 21 2.1.12 GST .................................................................................................................... 22 3 Model and methodology ................................................................................................... 23 3.1 Modelling long-run region-specific labour supply .................................................... 24 3.2 Endogenous determination of the national savings rate in VURMTAX ................... 26 3.3 Key Elasticities .........................................................................................................
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