Australia must shift taxes off productive effort (members)

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By Leith van Onselen

In the wake of biotechnology manufacturer, CSL’s, decision on Monday to build its new $500 million factory in Switzerland rather than Australia, Reserve Bank of Australia (RBA) board member, John Edwards, has called on Australia to cut its company tax rate to boost global competitiveness. From The AFR:

Dr Edwards said Australia needed to do more to ensure its tax system could compete…

“We always need to be concerned about the competitiveness of our taxation system”…

“In the long run we probably need to reduce the rate of company tax to one that is closer to some of our competitors. We are not that far off, but we need to go in that direction.”

Dr Edwards said Australia did not have a problem at the moment attracting foreign capital but some companies were choosing to move overseas.

CSL chief financial officer Gordon Naylor said on Monday the lower corporate rate in Switzerland of 18 per cent was part of the decision to build the new factory there instead of in Australia…

Edwards’ comments make a lot of sense. International capital is inherently flighty, making high rates of company tax a big disincentive for international firms looking to locate here.

Indeed, the Henry Tax Review showed that company tax has “a high marginal excess burden” (i.e. a big loss in consumer welfare relative to the net gain in government revenue), because “it is applied to capital, which is highly mobile” (see next chart).

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Moreover, as noted earlier this year by The Guardian’s Greg Jericho, Australia has the third highest reliance on company taxes when compared against other OECD nations (see next chart).

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Jericho also showed that company tax receipts are inherently volatile, which makes Budget planning uncertain (see next chart).

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Indeed, the Henry Tax Review argued to cut the company tax rate to 25% provided there were “improved arrangements for charging for the use of [non-renewable] resources should be introduced at the same time” through “a broad-based resource rent tax”.

The Review also noted that “current charging arrangements [for resources] distort investment and production decisions….. they fail to collect a sufficient return for the community because they are unresponsive to changes in profits” (see next chart).

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While company taxes are no doubt inefficient, a bigger concern in my view is the growing reliance on personal income taxes, whose share of total federal budget revenue is forecast by the Treasury to rise inexorably over the coming decade, whilst the take from company taxes, indirect taxes, and the GST will shrink (see next chart).

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As shown in the first chart above from the Henry Tax Review, personal income taxes also are highly inefficient – albeit less so than company taxes – with a marginal excess burden of 24% due to their discouraging effect on labour force participation. And worryingly, bracket creep is set to impose an increasing burden on Australian workers, according to the Treasury:

Fiscal drag [bracket creep] will pull someone on average full-time earnings into the 37 per cent tax bracket from 2015-16, and will increase the average tax rate faced by a taxpayer earning the projected average from 23 to 28 per cent by 2024-25 — an increase in their tax burden of almost a quarter.

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If fiscal drag is not periodically returned in the form of personal income tax cuts, it can reduce incentives for workforce participation at low levels of income, and increase incentives for tax minimisation at higher levels of income.

The key with tax reform, therefore, is not just to lower company taxes, but to shift the entire tax base away from productive effort and onto more efficient sources, such as land, resources and consumption, along with the closure of generous taxation concessions favouring the old and the asset rich.

Reform of this nature would both broaden the tax base – since virtually everyone would be captured – and be far more equitable than making the diminishing pool of workers shoulder the lion’s share of the tax burden.

It is also why all sides should place fundamental tax reform on the table and look to wind-back Australia’s world-beating and poorly targeted tax expenditures.

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