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The centrepiece of the 2019/20 budget was a proposed doubling of the income tax cuts that were legislated last year. Both the short-run LMITO change and the long-run tax cuts will reduce tax, but the two approaches are fundamentally different.
These differences are important, but they are hidden by the superficial nature of the tax debate in Australia. To differentiate between superficial tax changes and meaningful tax reform, it is necessary to understand the link between taxes, incentives, and behaviour.
We have used a dynamic tax model that factors in behavioural changes. This model applies an elasticity of taxable income to estimate the direct link between tax rates and the tax base, which allows for more accurate estimates of revenue changes, the efficiency cost (deadweight loss) from tax, economic output, and consumer wellbeing.
