Left and right unite in calls for an investment allowance

Earlier this week, the Business Council of Australia (BCA) called on the federal government to introduce an broad-based investment allowance to help stimulate the economy.

Now, the BCA has received support from the Australia Institute. Ben Oquist, the executive director of the progressive think tank, says an investment allowance is preferable to a general cut in the company tax rate. The Institute believes any investment allowance should only apply to investment in Australia, while it should also be limited to new investment, not to investment that would proceed anyway. From The AFR:

“Given the weakness of the Australian economy, with interest rates heading towards zero and monetary policy effectively being exhausted, other measures to stimulate the economy deserve support,” Mr Oquist said.

“An investment allowance is preferable to an across the board company tax cut. Australia Institute research has shown a cut in the company tax rate would provide a large windfall gain to overseas investors, and only provide a small benefit to local investment.

“A targeted approach to investment incentives with a sunset clause would provide the stimulus we need today without the revenue problems in the future.”

In a similar vein, the Grattan Institute has argued that policies like accelerated depreciation allowances and investment allowances would promote new investment directly and at far lower cost than cutting the company tax rate:

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…

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.

Clearly, expanding investment allowances would deliver far more ‘bang for the buck’ than cutting company taxes.

Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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