Be sure your dodgy modelling will find you out. I’m starting to think economists have become so used to pretending to know more about the economy than they really do that they don’t notice the way they mislead the rest of us.

The Productivity Commission has proposed a radical change in the way companies are taxed which, it tells us, would improve the economy’s productivity and leave us better off. It has commissioned modelling that, it implies, supports its case for change.

But when you read its report – and add some knowledge of how “computable general equilibrium” models of the economy work – you’re left with nothing but doubts.

Businesses hope for a cut in the corporate tax rate at the economic roundtable, but many just want tax simplified.Credit: Getty

The proposal involves cutting the present 30 or 25 per cent rate of tax on company profits to 20 per cent for all companies except the 500 or so with annual turnover (total sales) of more than $1 billion.

But it also involves introducing a 5 per cent tax on the annual net cash flow of all companies. This new tax would include an allowance for the cost of companies’ equity capital, and an immediate write-off of the cost of newly purchased assets, but no allowance for interest paid on the companies’ borrowing.

The commission paid for two sets of modelling of the proposed changes, one from Chris Murphy, Australia’s leading commercial modeller, and the other from the leading academic modelling outfit, the Centre of Policy Studies (CoPS) at Victoria University.

The commission’s report compares the results of the two modelling exercises for just the first proposed........

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