It seems not even Australia’s big businesses can agree on whether the Turnbull Government’s plan to cut the company tax rate to 25% from 30% is a sensible use of taxpayer funds. From The AFR:
Corporate Australia is split over Malcolm Turnbull’s company tax cut plan, with two of the country’s most prominent business leaders warning that the move may not stimulate investment by big companies and calling on the federal government to formulate a wider reform package to stimulate economic growth.
In comments which challenge the Prime Minister’s key economic policy, and BHP Billiton and the Business Council of Australia’s (BCA) position on tax reform, ANZ Banking Group chairman David Gonski and Australian Institute of Company Directors (AICD) chair Elizabeth Proust said focusing on part of the tax system was the wrong approach…
“If you ask me whether it is going to make a difference for big companies, I think things like accelerated depreciation and so on would make a bigger difference than reducing the tax rate. To us who are businesses based in Australia I think we should look at the big picture which is tax overall [Gonski said]”
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.
Cutting company taxes is also a poor way of driving business investment higher for a number of reasons.
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.
David Gonski is correct. 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, such as accelerated depreciation?
