Thursday, May 01, 2008

The Treasurer says the tax cuts will provide incentive

In a note to the Canberra Times he says they will have an "unambiguously positive impact on participation".

"Unambiguously positive", yes. But big?

His note to the Canberra Times is below, and below that is what I wrote for this morning's paper:

The Treasurer, Wayne Swan 30 April 2008:


Treasury analysis of the Government’s income tax cuts estimates an unambiguously positive impact on participation.

Treasury analysis of the tax cuts clearly shows an estimated additional 2.5 million hours of work being added to the economy each week (including 65,000 additional people in the workforce).

A report in today’s Canberra Times misrepresents Treasury modelling by suggesting the tax cuts will not provide any incentive for existing workers to put in more hours.

This conclusion is incorrect.

The article misleadingly compares the number of existing workers expected to reduce hours with those who increase hours, overlooking that the absolute average change in hours worked is greater for those increasing their hours.

The analysis of the Government’s tax cuts shows a positive net impact from the changing hours of existing workers on top of the positive number of new workers.

Analysis of changes in hours shows the LITO increase accounts for around one quarter of the total increase in hours from both existing and new workers, or the equivalent of over 500,000 hours a week of additional work being available to deal with labour shortages.

The Canberra Times article also claims a ‘scarcely noticeable effect’ from the decrease in the 40 per cent marginal tax rate. The modelling released clearly shows a substantial increase in the hours for existing workers, with this marginal rate cut accounting for over 10 per cent of the total hours increase.

Similarly, an article in Tuesday’s West Australian compares the number of new workers with the number of existing workers who decrease their hours in response to the Low Income Tax Offset (LITO) increase. This comparison of numbers does not accurately represent the change in total hours. The average increase in hours for new workers is more than double that for existing workers who decrease their hours, leading to a clear increase in total hours worked.

The tax cuts proposed by the Government will enhance individual incentive and workforce participation across the Australian population. It is the overall effect and its distribution that is critical for measuring how the tax cuts improve incentives and the capacity of the economy to grow and reduce inflationary pressures.

In today's Canberra Times:

The Treasurer Wayne Swan yesterday defended the $31 billion tax cuts due to be delivered in this month’s Budget, describing reporting of Treasury modeling of their effects in the Canberra Times as “misleading”.

The report on Wednesday’s front page said that previously secret Treasury data released under the Freedom of Information Act revealed that the tax cuts would produce incentives that worked “in two directions”.

While an estimated 32,284 Australians would be induced to work more hours, a greater number – 32,895 would decide to work fewer hours.

Mr Swan said in a statement that this did not mean that the tax cuts would provide no incentive for existing workers to put in more hours.

This was because the workers who increased their hours were projected to do so by more than the workers who reduced their hours.

As a result there would be “a positive net impact from the changing hours of existing workers” on top of an increase of 65,000 of the number of people in work.

The Canberra Times reported that the total net increase in working time resulting from the tax changes was projected to amount to around 10 minutes per person per week.

That equated to 2.5 million hours of labour per week.

The article reported independent calculations that suggested that each of these extra hours would be bought at a cost to revenue of more than $70.

The Treasurer disputed the article’s assessment that one aspect of the tax cuts - the decision to cut the 40 per cent tax rate to 37 per cent over time - would have a “scarcely noticeable effect” on employment.

The article reported that the Treasury had concluded the change would boost Australia’s workforce by 724 people.

In contrast the decision to increase the 30 per cent income tax threshold would bring an extra 34,828 Australians into work, and the decision to boost the Low Income Tax Offset would bring in an extra 28,568.

Mr Swan said that in addition to directly creating the 724 jobs the cut in the 40 per cent tax rate would also result in “substantial increase in the hours worked by existing workers”, accounting for over 10 per cent of the total hours increase.

The increase in the Low Income Tax offset would account for one quarter of the increase in hours worked.