The NATSEM report released today by Ann Harding and Neil Warren (Distributional Impact of Possible Tax Reform Packages) reaffirms the benefits of the Governments tax package.
The non-Government members of the Committee asked NATSEM to model the distributional effects of the tax package using a range of adverse assumptions regarding inflation, household specific price impacts, dissaving by lower income groups and the exclusion of food. In all, ten options were modelled for 29 cameo groups.
In the first option, NATSEM replicated the methodological assumptions as set out in the Governments policy A New Tax System (ANTS). Harding and Warren endorsed the Treasury estimate of a 1.9% CPI impact from the tax package and stated, "Generally speaking, our estimates of the net distributional effects for particular types of households of the Option 1 package are very close to the Governments estimates."
That is, the analysis confirmed no category of person worse off from the Governments tax reform. In fact, pensioners and low-income earners are better off from tax reform than without it.
Options 2 to 6 are based on a higher CPI impact of the GST because the Committee instructed the modellers to include in the CPI effect the expected impact of the tax package on tobacco and new home prices. Harding and Warren disagree with this approach:
It should be noted that we do not endorse using this measure as the appropriate indicator of the likely change in prices facing households. There are strong arguments for not compensating smokers for the likely increase in prices facing them under the ANTS tax reform package. In addition, we have not been able to model the distributional impact of the proposed First Home Owners Scheme, so that the adverse distributional effect of the GST on house prices is included within this measure but not the positive effect of the new scheme specifically designed to overcome this adverse effect (my emphasis).
Notwithstanding this adverse CPI assumption,
Under the assumptions implicit in Option 2, however, on average there are still no losers expected from the tax reform package for the cameo households modelled.
Option 3 uses the higher CPI estimate, and also uses household specific price effects (based on HES data) and an arbitrary dissaving assumption for low-income earners. The authors themselves disclaim the validity of Option 3 results because of their concerns about the higher CPI estimate.
We do not support this as the most appropriate measure of the impact of the tax reform package on prices, preferring instead a measure of price change which excludes the likely impact of tobacco and new house price changes.
After excluding such impact the report finds there is no category of person worse off under Option3B.
Option 4 builds on Option 3, with its attendant errors on tobacco, house prices and dissaving, and incorporates a 70% pass through of indirect tax cuts in the first year but 100% of increased costs arising from GST passed through. The authors again discount the usefulness of this option, stating
It is important to recognize that this 70 per cent scenario should not be viewed as the standard case. A strong defense can be mounted for the ANTS assumption of 100 per cent shifting forward. In particular, one could cite the powers being given to the Australian Competition and Consumer Commission (ACCC) to pursue businesses who do not fully pass on their tax related price changes.
This aggressive strategy is likely to ensure 100 per cent shifting of the indirect tax changes does act to offset the typical economic argument that the market will take some time for the tax-related price increase to flow through. Therefore, in the case of the ANTS reforms, 100 per cent shifting is probably the most reasonable assumption in the medium term. As a result, the 70 per cent WST and Stamp Duties shifting assumption should be viewed as at the extreme of the range of possibilities.
It is only by making unreasonable assumptions that the report can find categories of persons worse off and even then not very many.
Option 5 and 6 model the removal of food from the package and funding the revenue shortfall by reducing tax cuts (Option 5) or increasing the GST rate (Option 6). Warren and Harding note, however, with respect to removing food that what hasn't been modelled, but should be
is the increased complexity of a GST with food made GST-free, both for the Australian Taxation Office and the over 20 per cent of businesses who will be collecting GST. These increased compliance and administrative costs must mean a greater burden on households than we have been able to estimate in this study. This will manifest itself as reduced GST revenue (net of administrative costs) and the prices of goods and services increasing by more than we have estimated in this report.
In addition to the concerns of Warren and Harding, the Government does not support these options because they remove tax cuts principally from taxpayers in the $20 000 to $50 000 bracket and the GST rate would have to increase to 12%.
In Options 1 to 6, NATSEM assume that the Government would increase pensions by 3.4 per cent, notwithstanding introducing assumptions which produce a higher CPI then in ANTS and the Governments commitment to compensate pensioners above the CPI effect by a margin of 1.5 per cent. The results based on these cameos attempt to thus show what the likely impact of the tax reform package would be if the price effect of the tax reform package was different to that anticipated by the Government but the planned increase in pensions as per ANTS went ahead anyway.
However, because NATSEM assume a fixed 3.4% increase in pensions independent of what the CPI outcomes are, the These cameo results arethefore clearly not correct.based on false assumptions.
Because Warren and Harding reject the validity of the higher CPI assumption which was directed by the Committee, they modelled Options 3, 4 and 5 with tobacco and house price effects removed from the CPI as used in ANTS.
In these scenarios (the "B" options in NATSEM's report), Warren and Harding maintain the Governments actual compensation approach by assuming that pensions are increased by 1.5 per cent more than whatever the estimate of the CPI effect is for each option. The cameos in tThhese "B" options are the only cameos which correctly incorporate the governments compensation commitment..
Option 3B is stated by the authors to be "probably the most appropriate." Option 3B shows the outcomes using the lower CPI assumption and the compensation rate for pensions and allowances is 3.5 per cent (equal to NATSEM's estimated CPI of 2 per cent plus the Governments buffer of 1.5 per cent). Under Option 3B, every single group modelled is better off under the ANTS package.
It is clear from the report that Harding and Warren do not favour the removal of food from the GST base. The Australian Democrats were the driving force behind setting up the Senate Committee with the intention of mounting a case to exclude food. The Committee commissioned the work of Harding and Warren which finds against such an outcome. Indeed not one of the Committees consultants supports excluding food.
The additional options modelled on the basis of adverse assumptions, many of which Harding and Warren were clearly uncomfortable with, resulted in only 85 observations out of the 6090 modelled where particular households were not beneficiaries from tax reform.
If the 70% pass through option, which is considered unrealistic by Harding and Warren, is set aside then only 15 observations, mostly as a result of the arbitrary dissavings assumption, do not show a net benefit from tax reform.
This modelling was the last hope of Labor and the Democrats to undermine the Government's tax package. They have, however, been severely disappointed because of the professionalism of the modellers.
It is now the responsibility of the Senate to accept the weight of evidence in support of the benefits of the Government's tax package and pass the legislation.