Cut company tax, raise GST

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By Leith van Onselen

David Uren has published an interesting article today in The Australian making a solid case for cutting company taxes in exchange for raising the GST.

According to Uren, smaller trade exposed economies are better served by applying low taxes on company profits, since global corporations will tend to locate themselves and invest in jurisdictions where conditions are most advantageous, including tax rates:

Economies closely linked to the world economy are under the greatest pressure to have tax systems that are competitive. Taxing spending provides smaller nations with a more secure revenue base.

Australia is the biggest exception… We tax income, particularly company profits, much more heavily than most other countries and tax spending much less…

Australia’s company tax rate remains stuck at 30c in the dollar while the Organisation for Economic Co-operation and Development average has come down to 25.5 per cent. There are now only six countries with higher rates, four of them among the world’s largest economies.

Our GST tax rate of 10 per cent, by contrast, is little more than half the average OECD rate…

Australia has been able to maintain its peculiar mix of a high company tax rate and a low GST rate because of the resources boom. If global companies wanted to profit from China’s appetite for resources, they had to do it from Australia…

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Uren’s argument makes 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. By comparison, consumption is less responsive to increases in tax – we’ve all gotta eat afterall!

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”. By contrast, GST is relatively efficient, since it is broadly applied, is difficult to avoid, and does not significantly distort behaviour (see next chart).

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While not shown above, a broad-based land tax would have similar efficiency to the Petroleum Resource Rent Tax (PRRT) and Municipal rates, since it would be applied to a tax base that is completely immobile – land. In fact, the only loss in efficiency cause by land taxes would come from them being applied non-uniformerly to different land users (as occurs with municiapl rates), thereby distorting the pattern of land use.

Any discussion about tax reform, therefore, needs to also include implementing land taxes in place of inefficient and inequitable sources, like stamp duties.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.