CEDA commissioned a paper from Lateral Economics on how you would cut personal taxes to maximise economic growth by increasing labour supply. A survey of the existing literature suggested
1) Cutting tax to low and middle income earners either with reduced tax rates at the lowest level, a higher tax free threshold or tax credits (with different effects in each case). Tax credits produce far fewer jobless households than other policies.
2) If you feel our personal tax system needs to be more ‘competitive’ in the precise sense that you consider that tax on higher income earners may substantially inhibit skilled immigration to Australia or increase skilled emigration from Australia (fairly speculative propositions), then the appropriate thing to target is average tax rates to such people (because that’s what matters if they’re considering whether to work here or not) rather than the marginal rates they face. Accordingly lifting the top threshold is a more efficient means of targetting tax reduction to skilled workers than cutting the top rate – in terms of revenue foregone.
Factoid – based on the numbers before the budget, lifting the top threshold from $125,000 to $200,000 saves nearly three quarters of the revenue foregone from lowering the top rate to the second top rate. And lifting the top threshold to $1,000,000 per annum still saves 35% of the revenue cost of cutting the top rate to the second top rate.
If you want to read more, you can download it here. PS. [Apologies, but CEDA who commissioned the paper have requested that it not be available in full on the web and so I have had to break the link to the paper. I will post a summary when it becomes available from CEDA.]
Postscript: Mark Bahnisch has some comment on this here.