Revenue Effect of Changes to Key Tax Rates, Bases and Thresholds for 2019/20

Budget 2020 update - 14 May 2020

Due to the impact of the COVID-19 pandemic and the resulting uncertainty in projections, the Treasury is not in a position to update the Estimates of Revenue Effects of Small Tax Rate and Tax Base Changes for Budget 2020. The information presented here remains as it was for Budget 2019.

Caveats

The table outlined below estimates changes in tax revenue as a result of small changes in tax rates, thresholds and relevant tax bases only (as set out in the table below). Consequently, the table cannot be used for larger changes. For example, the effect of a three-percentage point change in the tax rates cannot be calculated by multiplying the effect of a one-percentage point change shown in the table by three. Larger changes require more complex modelling than is shown here.
The estimates are symmetrical, meaning that the revenue rise from a tax rate increase is of the same magnitude as the fall in revenue resulting from the equivalent tax rate decrease.
These estimates are subject to forecasting error and are dependent on sampled information.
These estimates also do not allow for second-round macroeconomic effects, but do make a limited allowance for the indirect effects on other taxes[3].
The estimates are intended to be indicative only, and are not Treasury's official best estimates. They are up to date at the time of publishing.

Table - Revenue Effect of Changes to Key Tax Rates, Bases and Thresholds for 2019/20 [1]

Direct Taxes	Full-Year Effect [2] ($m)
Change in Tax Rates [3]
A one-percentage-point change in:
top personal rate [4] (rate = 33%)	340
third personal rate (rate = 30%)	215
second personal rate (rate = 17.5%)	640
bottom personal rate (rate = 10.5%)	420
company rate (rate = 28%)
change in company tax revenue from company tax rate change	540
change in company tax revenue excluding Crown-owned companies [5]	490
imputation credits offset if personal rates do not change when company rate does [6]	160
change in total company tax revenue less personal tax offset	380
change in company tax revenue excluding Crown-owned companies less personal tax offset	330
Changes in Thresholds
A one-thousand-dollar change in:
the top personal income tax threshold (currently $70,000)	20
the middle personal income tax threshold (currently $48,000)	160
the bottom personal income tax threshold (currently $14,000)	190
Changes in Tax Bases
A one-percentage-point change in the growth rate of:
wages and salaries	390
taxable business profits	195
Indirect Taxes
Change in the GST base and tax rate
A one-percentage-point change in:
the total GST base [7]	315
the private GST base [8]	230
A one-percentage-point change in the GST rate (current rate = 15%):
impact on total GST	1,875
impact on GST generated from private spending only [9]	1,325
Changes in the excise duty rates [10]
Alcohol [11]: $1 change in the relevant rate per litre of alcohol for beer, wine and spirits	25
Tobacco [12]: $10 change in rate per 1000 cigarettes	10
Petrol [13]: 1 cent per litre change in excise duty on petrol	35

Please read the Introduction for more information about this table, including the caveats and assumptions.

Notes

[1] These estimates are intended to provide rules of thumb for small changes in tax rates and thresholds. Composite proposals involving large changes will generally have different revenue effects from the estimates presented here because of interaction between tax types and greater behavioural responses. The response to a price change in terms of altered consumption is often quite different over a long period of time compared with a short period. Where applicable, these estimates are based on the short-term responses.
[2] The calculated changes to tax revenue are for the 2019/20 fiscal year (July 2019 to June 2020), with the exception of the estimates for changes to personal tax rates and thresholds. These are 2019/20 tax year (April 2019 to March 2020) estimates, as this corresponds to the annual period over which such a change would generally apply. Estimates have been rounded to the nearest five million dollars.
[3] These estimates allow for the effect on indirect taxes through changes in consumption and on direct tax through changes to company profits, but do not incorporate possible second-round effects on wages and profits. Fiscally-neutral changes in tax paid on benefits are excluded. The aggregate labour supply response is assumed to be zero in the short term.
[4] The tax rates and thresholds are: 10.5% up to $14,000; 17.5% between $14,000 and $48,000; 30% between $48,000 and $70,000; 33% above $70,000.
[5] Some Crown-owned companies pay income tax, e.g. SOEs. This figure is the core Crown change in revenue, gross of any individual tax offset (see note 6).
[6] When the company tax rate changes, so does the rate at which imputation credits are attached to dividends paid to shareholders. If personal tax rates remain unchanged when the company tax rate increases/decreases, the imputation credit for the individual shareholder will be a greater/lesser offset against their personal tax liability. Consequently, while company tax revenue increases/decreases, there is some offset through personal tax revenue decreasing/increasing. In calculating this offset, we have assumed the average shareholder is in the 30% personal tax bracket. Depending on the transitional arrangements for imputation credits enacted at the time of a company tax rate change, there may be a delay in the personal tax offset.
[7] The total GST base includes all private spending that attracts GST, along with public consumption.
[8] The private GST base includes all private spending that attracts GST.
[9] Changes in government expenditure generated by changes in the GST on public spending are offset by equal and opposite changes in GST revenue, ie they are fiscally neutral. The effect of a change in the GST rate, on private expenditure only, gives the net impact of this tax change to the government.
[10] The estimates of the revenue effects of excise rate changes include GST on excise duty and assume equal changes in excise-equivalent Customs duty rates applying to these products.
[11] Estimates allow for a 0.5% fall/rise in beer consumption for each 1% increase/decrease in retail price and a 1% fall/rise in other alcohol consumption for each 1% increase/decrease in retail price.
[12] Estimates allow for a fall/rise in consumption of 0.5% in response to a 1% increase/decrease in retail price. A $10 change per 1,000 cigarettes is equivalent to a change in the cost of 20 cents per packet of 20 cigarettes. An equivalent increase for other tobacco products is also assumed.
[13] Estimates allow for a fall/rise in consumption of 0.015% for each 1% increase/decrease in retail price. The medium-to-longer term impact on consumption is likely to be larger as fuel prices affect future vehicle choices.

Last updated

Thursday, 14 May 2020