The Productivity Commission (PC) recently announced a review of the corporate tax system, with the PC expected to release a draft report in late July and its final recommendations in December.
Commission chair Danielle Wood says the review will examine issues such as tax incentives for new capital expenditure and cutting the tax rate paid by larger businesses from 30% to 25%.
However, cutting the company tax rate to 25% would cost the federal government $79 billion over four years, according to the Parliamentary Budget Office’s build-your-own-budget tool.
“To get bang for buck, we are interested in stimulating new investment in plant, capital, tools and technology”, Wood told The AFR.
“We are very conscious of the budget impact of any move so we are thinking of a package that is broadly revenue neutral or doesn’t produce too much of a hit to the budget”.
Cutting corporation taxes in isolation would be a huge mistake. It would result in a windfall gain for overseas investors who had previously invested in Australia at the present tax rate.
It would increase the tax burden on Australians via personal income taxes while lowering national income.
Australia’s tax system is already overly reliant on personal income taxes; lowering the corporation tax rate alone will exacerbate this reliance.
Furthermore, a general corporate tax reduction would benefit global miners, who are substantially undertaxed in Australia.
Chart by Tarric Brooker
Australia should aim to collect more tax money from mining companies, not less.
As shown in the chart below from The AFR, Norway has the world’s highest corporate tax collection due to its robust tax collection from oil and gas firms.
Norway taxes its oil and gas sector at around 80%.
In contrast, Australia significantly undertaxes its oil and gas industry.
Because of their high resource taxes, Norwegians are the world’s wealthiest people.
A country with 5.5 million inhabitants now has a sovereign wealth fund worth nearly $US350,000 per resident.
Rather than universally cutting in corporate taxes, Australia should follow Norway’s lead and properly tax its resources. We can then use these tax revenues to lower other taxes, like personal income taxes.
An investment allowance or some other incentive for new capital expenditure makes far more sense than lowering the company tax rate because it allows businesses to depreciate new assets sooner, directly increasing investment.
Unlike cutting the corporate tax rate, an investment allowance would not apply to existing assets, resulting in a considerable savings to the federal budget.
Thankfully, it seems like the PC understands these issues, which is why it is examining “a package that is broadly revenue neutral or doesn’t produce too much of a hit to the budget”.
