Ever since the Turnbull Government launched its plan to cut the company tax rate to 25% from 30%, it has argued that lower company taxes are vital to ensure that Australia remains a desirable destination for foreign investment. Without such cuts, the Coalition argues, Australia would lose-out on foreign investment to other more competitive nations, resulting in lower growth and job creation.
Regular readers know that I do not support the Coalition’s company tax cut plan because:
- most of the benefits would flow offshore;
- national income would be reduced;
- the Budget would lose significant revenue, resulting in tax rises or expenditure cuts elsewhere, and potentially a credit rating downgrade (hence lowering jobs and growth); and
- Treasury’s own modelling showed almost no benefits to jobs and growth.
At an estimated cost to the Budget of $8.2 billion per year, I also believe that there are many other policy options available that would more effectively boost jobs, growth and overall wellbeing of the Australian people at far lower cost.
Nevertheless, today I want to tackle the specific issue of business investment and explain why cutting company taxes is such a poor way of driving it higher.
First, the Coalition’s plan would provide company tax cuts to foreign owners of pre-existing investments made under old tax regimes. It would, therefore, represent a free gift from taxpayers without any new investment actually taking place, which is an inefficient use of scarce funds.
Second, there is no guarantee that foreign business owners would use the windfall from lower taxes to boost investment in Australia. They are more likely invest it elsewhere, use it to pay down debt, or return it to their shareholders.
Given the huge cost of the Turnbull Government’s company tax cut plan, as well as the uncertain outcomes with regards to stimulating business investment, it makes far better policy sense to use scarce taxpayer funds to encourage new investment only, not reward pre-existing investment that is a sunk cost.
Policy options that could achieve this outcome include accelerated depreciation allowances, investment allowances, or some other measures. These would promote new investment directly and at far lower cost than cutting the headline company tax rate to 25%. On this point, the Grattan Institute provides a sensible policy alternative:
There are alternatives to a full-blown company tax cut that could boost investment without delivering large windfall gains to foreign investors at such cost to the budget bottom line. Grattan Institute’s Orange Book 2016 suggests lowering effective company tax rates via investment allowances or accelerated depreciation on new investment.
An investment allowance, via a tax deduction to businesses for the purchase of new assets, would provide incentives to boost investment. Since the deduction would apply only to future investments, not past ones, it provides incentives to investment without sacrificing tax revenue on existing investment.
In the past, including at the height of the Global Financial Crisis, governments have adopted investment allowances to promote investment. In its 2015-16 Budget the Coalition included an accelerated depreciation allowance, albeit only for small businesses. Some argue that the unwillingness of major business groups to engage with these alternatives suggests they are less interested in the economic gains than in the windfall benefits of a tax cut.
Again, if the Coalition’s goal is to promote business investment, why persist with an indirect and expensive policy like cutting the company tax rate when cheaper and more effective options are available?
