There seems to be a concerted effort to dissuade the Turnbull government from lowering the company tax rate in next month's budget. We've seen modelling from Victoria University claiming that a company tax rate cut could boost the economy but lower national income, Chris Bowen claiming that a company tax rate cut would cost $35 billion, and an open letter last week from 50 public figures. Bill Shorten has claimed a company tax rate reduction would cause economic mayhem.
Arguments against cutting company tax rates vary from being wrong-headed to bizarre. Surely one of the most bizarre arguments against cutting the company tax rate is that it wouldn't benefit small business — quite possibly because small business got a company tax rate cut last year.
Then there is confusion over the effects of dividend imputation. The company tax system is not a substitute for personal income tax. For Australian tax residents the company tax is a pre-payment of personal income tax. Changing the company tax rate (and assuming dividend payout rates remain unchanged) there should be no difference in the tax paid on company profits by Australian tax residents.
In the first instance the biggest beneficiaries of a company tax rate cut would be foreign investors. True, current foreign investors are willing to invest in Australia with a high company tax rate. Yet all those investors who are unwilling to invest at current high company tax rates could be more willing to do so. Last week we read in these pages the astonishing claim that increased foreign investment into Australia would lead to a decline in national income. Mind you, the modelled tax cut would boost GDP, increase the capital stock, increase production, and increase real wages. As if those outcomes were somehow bad.
Of course, that is the rub. Company tax is an expensive tax. The Henry Review estimated the deadweight losses association with company tax to be 40 per cent. It is unsurprising that many countries around the world are lowering their company tax rates as quickly as they can. In the 2010 budget papers, the then Labor government supported a company tax rate cut, boasting that it would drive productivity gains and increase real wages. No talk then of declining national income.
The fact is when it comes to company tax, Australia is not a low tax nation. Our company tax rate of 30 per cent (for large business) is the fourth highest in the OECD. The revenue generated by the company tax system is the second highest as a proportion of GDP, and as a proportion of total tax revenue, in the OECD (after Norway). The dividend imputation system — while benefiting tax resident shareholders — does not alter the fact that the Australian company system is onerous and expensive. If the incidence of the company tax does largely fall on Australian workers — as many, including Treasury, argue — then lowering that tax burden should be an immediate priority for any government.
All the talk of avoidance and tax havens and whatnot overlooks some damning statistics. According to the latest ATO data (financial year 2013-14) the company tax system raised some $66.9 billion. The personal tax system raised $166 billion. Yet it is not the magnitudes of those numbers that we should focus on, but the distribution of those numbers. For example, the bottom 81 per cent of all personal tax payers paid $66.2 billion in net personal income tax. The top 5 per cent of personal income tax payers paid $55.5 billion in net personal income tax — less than the revenue from the company tax.
So whatever the perception of companies not paying tax — it is simply not true. The Australian company tax system is onerous and generates a lot of revenue for the Commonwealth. There is an argument that without that revenue, the Commonwealth would be unable to "invest" in infrastructure and public goods, which in turn would benefit business. That argument, however, fails to explain why many other countries have better infrastructure than Australia (as measured by the OECD) yet have lower company tax rates and generate less company tax revenue than Australia.
All up, there were excellent reasons to lower the company tax rate in 2010. The then Labor government understood that lower company tax rates meant higher productivity, higher levels of investment, and higher wages for workers. It is a pity that the Labor opposition does not hold to those views.
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