Changes in Indirect Taxes in Australia: A Dynamic General Equilibrium Analysis

Abstract

Over the last thirty years, the effects of indirect taxation changes have been analysed using comparative static general equilibrium models. We use a new method to analyse current changes in Australia’s indirect taxes: dynamic computable general equilibrium modelling. Comparative static methods compare the situation in a given year (usually unspecified) with and without a policy change. The dynamic method shows the effects of a policy change through time. Comparative static methods are usually restricted to estimates of long‐run changes in allocative efficiency. The dynamic method provides information not only on efficiency but also on adjustment processes, including variations in employment. With our dynamic method, the effects of policy changes are analysed as deviations from explicit forecasts. We find that these forecasts are important for the policy results. For Australia’s current set of indirect tax changes, our main conclusions are (i) the short‐run employment effects depend critically on the wage response; (ii) merchandise exporters benefit but tourism is harmed; and (iii) the long‐run welfare effectsare likely to be negative, reflecting a decline in the terms of trade and increased compliance costs.