Odds shorten for company tax cut

By Leith van Onselen

After spending the better part of six months lamenting the scourge of bracket creep on Australian workers, it appears as if the Government is set to lower the company tax rate in the May Budget, with Liberal strategist, Senator Arthur Sinodinos, talking up its benefits to workers over the weekend. From ABC Radio:

ARTHUR SINODINOS: Ultimately there are lots of studies that show that that ultimately leads to higher GDP (gross domestic product) in the economy and higher wages for workers; at least 50 per cent of the impact of cutting company taxes goes in higher wages for workers and higher employment…

Other commentators, like executive director of the Australia Institute, Ben Oquist, do not believe that there is strong evidence that company tax cuts would deliver stronger growth or appeal to voters:

BEN OQUIST: There’s no modelling doing a comparative analysis that if you spent the revenue on other things – on infrastructure, on transport, on education, on child-care – you wouldn’t get a better growth dividend.

And for those proponents of a company tax cut that’s what we need to see, that comparative analysis that this is the best way of spending government revenue. It won’t stack up.

Australia has a revenue problem, we’re a low-taxing country. Even Australia’s company tax rate is only in the middle of the OECD pack.

In that environment the economic case for a company tax cut is very weak.

LOUISE YAXLEY: Mr Oquist says it would also be a political risk.

BEN OQUIST: A company tax cut is about the lowest-ranking option for voters in terms of spending government revenue, but counter-intuitively, even personal income tax cuts are no longer as popular as spending the money on government services or infrastructure.

And I think in a climate where we have been repeatedly told that the budget is under strain there’s even less appetite for tax cuts and in particular company tax cuts, when we’ve had a barrage of information about how little companies are paying in tax and how much tax avoidance is going on.

When talking up its ultimate benefits to workers, Senator Sinodinos is referring to the Australian Treasury’s Tax Discussion Paper, which noted the following about Australia’s company taxes:

Company income tax has a high marginal excess burden because of the relatively high company tax rate of 30 per cent in Australia, combined with the high level of mobility of the underlying tax base…

A tax system that relies too heavily on inefficient taxes, uncompetitive tax rates and poorly targeted or ineffective concessions will impose significant economic costs on the economy. These costs fall disproportionately on less mobile factors of production, including domestic labour…

Recent research by the Treasury indicates that, in the long run, much of the burden or incidence of company tax falls on Australian workers. This is because, over time, the amount of capital investment in Australia (for example, the construction of buildings and purchase of equipment for production) is affected by the company tax rate. Lower amounts of capital investment in the Australian economy will reduce the output or productivity of labour and, in turn, reduce the real wages of workers…

The Henry Tax Review also showed that company tax has “a high marginal excess burden” because “it is applied to capital, which is highly mobile” (see next chart).

According to the OECD, Australia’s company tax rate is also relatively high compared against its OECD peers:

And there has also been a trend towards lower company taxes across many OECD jurisdictions:

One key concern with lowering the company tax rate is that most of the benefits would flow to foreign shareholders because of Australia’s dividend imputation system. That is, as the company tax rate is reduced, domestic shareholders would pick-up some of the cost via the reduced value of franking credits.

My bigger concern remains that reducing company taxes in isolation does nothing to shift the burden of taxation from ordinary workers, whose share of total federal budget revenue is already forecast by the Treasury to rise inexorably over the coming decade (see next chart).

Indeed, the data already shows that the percentage of total taxes from productive effort – i.e. raised from personal and company taxes – in Australia is the second highest in the OECD, with around two-thirds of this coming from personal taxes. Thus, it is workers that are ‘getting it in the neck’ when it comes to taxation (see next chart).

Ultimately, the best way to reform the tax system is not to provide an ad hoc cut to either company or personal taxes, but to shift the entire tax base away from productive effort and onto more efficient sources, such as land and resources, along with the closure of generous taxation concessions that favour 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.

Sadly, the broad discussion on tax that we were promised when the Coalition took office has gone missing.

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