With the Rudd Government mulling a second stimulus package to resuscitate the ailing economy, tax cuts are again back on the table. Treasurer Wayne Swan was coy yesterday when asked whether the latest moves would lead to cuts in personal or business taxes or whether he would bring forward previously mooted measures. Sick of waiting, Crikey asked a group of leading economists whether personal or business tax cuts were the best way to stimulate spending.
Saul Eslake — ANZ Chief Economist: As much as I would personally love a tax cut, I don’t think cutting personal income tax would be particularly effective in dealing with the looming deterioration in the Australian economy because the people who would most likely benefit form tax cuts would be more likely to save rather than spend it. It would appear that those who benefited form the last round of tax cuts that came into effect in July did exactly that. Now, what the government did last year in its economic rescue package was target those people who were more likely to spend the extra cash in order to boost the economy.
Appropriately targeted tax breaks for business could be of some assistance in bringing forward investment or preventing the cancellation of investment that might otherwise occur so that, for example, introducing a 25 per cent depreciated allowance for investment put in place before July 2010 might be a measure the government could consider. But across-the-board cuts would be unlikely to have any substantial stimulatory effect.
Brian Redican — Senior Economist Macquarie Bank: I think cuts in personal income taxes would be much more effective than company tax cuts. Even though company profits are under downward pressure, company taxes wouldn’t improve investment because the main issue is underlying demand. Obviously the government has foreshadowed a range of tax cuts over the next two years. I would think bringing forward the tax cuts scheduled for July 2010 in addition to those in July 2009 would cost them 8 to 9 billion dollars and would be a huge step forward.
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Adam Carr — Senior Economist, ICAP: I think personal cuts are the right way forward if you want to realistically stimulate aggregate demand — they’re basically a permanent way of doing that. There was a lot of concern when the temporary fiscal boost was previously announced over whether the tax cuts would be saved or spent. For the time being, personal tax cuts would be the best policy because they’re broad based. There’s a possibility that corporate tax cuts could alleviate pressure for job shedding, so rather than rather than blanket company tax cuts, the government should be considering targeted tax breaks aimed at encouraging companies to retain staff.
Chris Caton — Chief Economist, BT Financial: I can’t think of a reason why the previously announced tax cuts wouldn’t be brought forward. But you have to think in terms of temporary measures and that rules out further substantial cuts. Going into deficit is perfectly appropriate now but in the long-run permanent fiscal measures are not so smart. By announcing further permanent cuts the government is effectively pre-empting the Henry Review into the tax system — they should wait for Henry before doing anything permanent. Personal tax cuts win every time because in a world of dividend imputation, company taxes are just withheld anyway. So in the current climate, personal tax cuts make more sense.
Tony Meer — Deutsche Bank chief economist: I’m forecasting that the personal tax cuts which are already announced for July this year and I’m expecting some of the further cuts to be brought forward. So we’re likely to see additional movements in the low income tax offset. I think that’s a good thing because if you’re in a position where things are slowing down and you’ve got a falling global economy, personal tax cuts are likely to boost demand in the short term. Alternatively company tax cuts are always problematic in terms of whether or not they’re going to boost demand and stimulate spending.