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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Taxation rates

With respect to personal taxation rates, there are several Federal and State government taxes that impact on both households and businesses.  Like before, the effects of two will be explored:  income tax and business tax rates (e.g. company tax rates).  A decrease in income tax rates will increase disposable income as more of a person's income is forcibly taken by the federal government.  This increases Consumption, AD and economic growth and has the same effects on the other government objectives as discussed for a rise in disposable income.  That is, it will make low inflation more difficult to achieve as inflationary pressures will increase.  It will also assist with the goals of full employment and equity in the distribution of income as jobs are created and people move from transfer incomes to higher factor incomes.  With respect to the impact on the achievement of external stability, lower income tax rates will tend to increase Consumption and import spending, therefore reducing the balance of trade surplus (or lifting the deficit) and increasing net foreign liabilities (either NFD or NFE).


The above explanation focuses on the demand side impact of lower income tax rates.  However, a drop in income tax rates can have beneficial supply side impacts.  Lower tax rates provide an increased incentive for workers to lift performance (particularly for those in occupations where a clear link is established between performance and remuneration - such as sales) and this can boost labour productivity, result in lower average costs of production, lower prices and therefore assist with the low inflation goal.  The lower prices will then help to stimulate AD, real GDP and therefore economic growth.  This has favourable impacts on all of the government's goals (see discussion for 'productivity' later) and is a point governments like to make when reducing income tax rates.  With respect to low inflation it is generally accepted that the SUPPLY side effect would not be pronounced enough to outweigh the demand side effects.  Accordingly, inflation would be expected to rise when income taxes are lowered.

With respect to business taxes, a decrease in business tax rates increases the disposable income for businesses or alternatively makes it easier for spending proposals to be justified in light of an anticipated rise in demand if the lower taxes are passed onto the consumer.  Accordingly, there is likely to be an increase in Investment, AD and economic growth.  This should assist with the full employment and equity in the distribution of income.  With respect to the impact on low inflation, the lower company tax rates can (on the supply side) actually contribute to lower inflationary pressure in the shorter term as the costs of production for businesses are lower and they can pass these lower costs onto the consumer in the form of lower prices (particularly in more competitive markets).  However, this is balanced against higher demand inflationary pressure stemming from higher Investment and AD (demand side).  Over the longer term, however, the economy could experience reduced inflationary pressure if the Investment demand takes effect in the economy in the form of added productive capacity and (potentially) higher productivity (again on the supply side).  With respect to the impact on the achievement of external stability, the attainment of low inflation improves Australia's international competitiveness, boosting the Balance of Goods and Services and the Current Account, which should help to decrease net foreign liabilities (either NFD or NFE).

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