Should Australia cut company taxes to boost growth?

By Leith van Onselen

The Australian Treasury’s head of revenue, Rob Heffren, is pushing to cut the rate of company tax in order to boost foreign investment. From The Canberra Times:

Mr Heferen said lower company taxes boosted foreign investment, resulted in more jobs, higher wages and increased productivity…

“Let’s be clear: taxes have negative consequences for economic growth.. some are worse than others,” Mr Heferen said…

“Australia’s company tax is relatively high by global standards, particularly with a number of other countries [in the developed world] having reduced their rates,” Mr Heferen said…

Mr Heferen said while Australia should not compare itself to low-tax nations like Singapore, high company tax meant Australia was losing economic benefits.

He said reducing the company tax rate would cost the federal budget in the short term, but over the long term it would increase economic activity and productivity.

Heffren has a point. Just last year we witnessed biotechnology manufacturer, CSL’s, decision to build its new $500 million factory in Switzerland rather than Australia, citing Australia’s high company tax rate as a factor. Switzerland’s company tax rate is 18% versus Australia’s 30%.

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 last 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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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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