From the get-go, MB has opposed the Turnbull Governments proposed reduction in the company tax rate from 30% to 25% on the following grounds:
- Foreign businesses and shareholders would gain the lion’s share of the benefits due to Australia’s dividend imputation system;
- The Budget would lose $8.2 billion a year, according to Treasury’s own modelling; and
- Treasury’s own modelling showed minuscule benefits to either jobs and growth.
Of the three reasons listed above, the second – the huge cost to the Budget – is the most pertinent. This is because the $8.2 billion in Budget revenue lost from cutting company taxes would need to be made up somehow, most likely via some combination of raising income taxes and cutting back on social spending. However this is done, it is likely to have negative impacts on ordinary workers, as well as on economic growth and job creation.
Over this past week, we have seen the company tax debate pivot to focus on how the cuts could be funded.
On Monday, The AFR published an interesting article canvassing ending (or reducing) Australia’s unique dividend imputation system to fund company tax cuts (which MB dissected).
Today, The AFR has gone one step further:
The tax cut is estimated to cost the budget about $8 billion per year. The dynamic effect of increased investment could improve tax collections and reduce this to about $4 billion per year according to modelling. But in an era of fiscal deficits, that may still be too expensive.
Default government policy is to finance the corporate tax cut relying on bracket creep in the personal income tax…
The government does have other options, which have been largely ignored in the present debate. This is likely because different stakeholders in the business and investment community are affected by these changes.
…the government can finance the rate cut in the company tax system itself by broadening the base or reforming the corporate-shareholder tax system…
1. Broaden the base by moving to a comprehensive business income tax (CBIT) that would abolish interest deductibility.
The approach of broadening the base and lowering the rate has long been useful in producing efficiency gains and sufficient revenue. One way we can do this in the company tax is by eliminating deductions for interest costs, called a comprehensive business income tax (CBIT). We would exempt or provide a discount for dividend and interest income (like capital gains) at the personal level.
While this appears a radical change, limits on interest deductions are increasingly prevalent around the world. This could raise enough revenue to finance a corporate tax rate cut to 25 per cent, with an increase in consumer welfare of $1.7 billion…
2. Replace the dividend imputation system with a discount for dividends…
We model replacing full imputation with a partial dividend discount, similar to the CGT discount and find that this can fund the company tax rate cut. This has a net gain in consumer welfare of $2.3 billion.
3. A supplementary economic rent tax on financial services
…a tax on economic rents in the financial sector (and perhaps resources) on top of a lower tax rate across the corporate sector can be revenue-neutral. We model an 8 per cent financial services rent tax which produces a net gain to consumer welfare of $3.6 billion and is revenue-neutral at a general company tax rate of 25 per cent. This is much more efficient than the Major Bank Levy introduced in July.
MB strongly opposes cutting company taxes in isolation for the reasons listed above. But if it is done in a revenue-neutral way as part of a broader reform of business taxes, then we could certainly support it.
Whatever the case, the new found concern over how lower company taxes would be funded is a positive development.
