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The Australian Government has released modelling that shows that "the positive growth impact from cutting income tax would be broadly offset by the negative impact of raising goods and services tax (GST)," Treasurer Scott Morrison has announced.
According to Morrison, the Government has been "rigorously testing a range of tax reform scenarios." It has published modelling on a scenario involving large scale income tax cuts funded by an increase in the GST rate from 10 to 15 percent.
Morrison said that the scenario is not "a preferred option" for the Government. Instead, the aim is to "test the potential economic benefits of a tax mix switch which maximized personal income tax cuts."
Morrison explained that once an automatic increase in inflation-adjusted welfare payments is taken into account, the negative impact of raising the GST would outweigh the positive effects of income tax cuts. He added that this scenario "would fully compensate less than 10 percent of households in the lowest quintile and around 20 percent in the second quintile," while measures "to fully compensate low income households would further reduce the scope for personal income tax cuts, therefore adding to the costs to growth."
The published Treasury brief stated that the case for a "tax mix switch" would "need to be made forcefully using broader arguments. These include the impetus to entrepreneurial behavior, international competitiveness, and reducing incentives to channel personal income into company and other structures."
The Government has also released modelling illustrating the economic impact of bracket creep. Morrison said that while this modelling is "indicative at best," it "clearly shows the economic benefits that can flow as a result of Australians being unshackled from higher taxes resulting from bracket creep."
"The economic cost of rising average tax rates is large (0.55 percent of gross domestic product) because it creates distortions in all sectors of the economy. The economic distortion from all taxes increases as personal income tax rates rise," the Treasury brief said.
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