How should we cut personal tax to maximise economic growth?

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.

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JC
JC
15 years ago

Fixing the tax system to maximize growth?

1 Flat tax of 25% no deductions of any kind payable from 25,001

2 elimination of the captial tax which is just a tax on capital anyway

3 No corporate tax

4. Raise the GST to 15%

Make the system a transitory one while we are on our way to an expenditure tax.

JC
JC
15 years ago

Sorry meant to say

Change the system to a sales tax (Not GST)

Flashman
15 years ago

Fairfax columnist Ross Gittins refers to your paper in his column in today’s Sydney Morning Herald

Patrick
Patrick
15 years ago

I did find it interesting that you recommend lowering the bottom marginal tax rate and raising the threshold, both against conventional wisdom as I understood it (not that I place much faith in that).

Although I thought that LITOs were simply a targeted way of raising the threshold, and so, on the reasoning generally applied in your paper, a superior way.

Also, do you have any idea where the figures from the 2000 (or was it 1999) Whitehouse study on churning and targeting across the OECD are at now? If I understand it correctly we must be churning more now, with slightly less targeting, than then?

Patrick
Patrick
15 years ago

Do you agree with my belief that we should increase the GST to 20%, offsetting this with progressive low-income household rebates so as to create, effectively, a progressive consumption tax?

Using the revenues to lower corporate and personal income tax (although merely raising and indexing the brackets might be enough for the personal rate)?

After all, there is not yet any (high-income-earner-appealing) way of structuring your affairs so as not to buy things, and this implicitly lowers the tax on savings, something that a lot of people (eg RBT) identify as important

spog
spog
15 years ago

The trouble with the LITO is people don’t actually get it until after they lodge their tax return. It’s not available as a part of the tax deducted from wages and salary.

How does that affect the supposed incentive benefits it produces? Especially given that people are generally spectacularly ignorant of the way in which the tax-transfer system works, and so won’t necessarily be “incentivated” by a LITO they don’t know exists.

JC
JC
15 years ago

“Secondly savings incentives go overwhelmingly to the rich.”

Well actually savings are made by the middle class and the rich, not just the rich.
However the question is how do we encourage higher economic growth through tax policy?

The fuel for higher economic growth is savings because savings are converted to investment and if you wish to raise the standard of living you want to raise the capital to labor ratio as much as possible. The higher this ratio is the better.

So the real quesation is how do we raise the standard of living and the only way is to incrtease savings thereby raising that ratio.

JC
JC
15 years ago

Look Nick, I work for myself and keep getting told by the accountant that super offer all these tax advantages. That’s true but the problem with super is that every 6 months the guys in Canberra continue to tinker with it and one of these days they’ll tinker with it in a disadvantagous way as I

JC
JC
15 years ago

CONTINUED
……..they’ll tinker with it in a disadvantagous way as I am a firm believer that one never gets in the way of a politician and a pile of cash.

It also seems too complex.

Wouldn’t it be better to make it less complex? There seems a rule attached to super even if you breathe close to it.

Patrick
Patrick
15 years ago

Yea, in a fantasy world I could say a lot about super. In this world, our system is the best I’ve ever yet seen besides Norway’s anamalous-and-utterly-irrelevant-to-anyone-else national fortune.

However they might ‘tinker’ with it, at least it is your money and it is there – whereas in most countries, you have nary but a promise as to a third party’s behaviour! To quote (loosely translated) a French waitress: I may as well smoke and drink, since the way things are going there won’t be any pension anyway!