Australia Can't Afford Not To Cut Company Tax
28 September 2016
This opinion article by Business Council Chief Executive Jennifer Westacott was published in The Australian Financial Review on 28 September 2016.
For many years, our two major political parties were united in their agreement that Australia needs a more competitive company tax rate to maintain our position as an economic leader on the world stage.
Unfortunately, just as truth is the first casualty in war, this much-needed and sensible bipartisanship was one of the first casualties in one of the most brutal federal election campaigns this country has seen in recent years.
The Government’s Enterprise Tax Plan Bill seeks to narrow the gap between Australia’s 30 per cent company tax rate and today’s average OECD rate of 25 per cent over the next 10 years.
The proposal is careful and even modest by international standards. But by locking in the 25 per cent rate for all businesses by 2026-27 it will send a credible and positive signal that reorientates the dynamic in favour of investing in Australia.
However, we now face the real prospect of tax cuts for larger business being defeated in the Senate.
Why? Because politics has made the demonisation of the business sector an acceptable and effective weapon to be used in campaign crossfire.
But at what cost? Let’s be clear about what’s at risk, should tax cuts for larger businesses be excised from the Enterprise Tax Plan Bill.
The simple fact is we cannot afford not to reduce our company tax rate for all businesses. We cannot ignore the reality that Australia operates in a global economy. We are fooling ourselves if we think that we can opt out of it.
To maintain our standard of living, particularly our ability to pay for vital social services like health and education that Australians rightly value, we simply have to remain competitive to attract more investment.
Business investment is a core driver of economic growth.
Businesses invest in new factories and plants, state-of-the-art machinery and equipment and cutting edge technologies. This leads to more jobs allows higher wages to be paid.
But right now, we are falling further and further behind in this global contest.
Even with record low interest rates, Australia has an investment problem. Private business investment has fallen substantially over the past three years. The last time it was falling as fast was during the early 1990s recession.
No one is suggesting that tax is the only factor affecting investment decisions but a globally-competitive company tax rate is one of the most direct and effective economy-wide policy levers we have at hand. Other countries know this and have been reducing their company tax rates while we have stood still. Australia now has the 6th highest company tax rate in the OECD compared with 16th highest in 2001. It is currently 5 percentage points above the OECD average.
This gap matters a lot. Businesses make choices about where to invest their next dollar and our high tax rate means that more and more investments at the margin are not made in Australia.
This makes cutting company taxes for all businesses one of the most urgent priorities for reform.
Higher investment will make the national economic pie grow – a 25 per cent tax rate is estimated to increase GDP permanently by around 1 per cent or $16 billion per year in today’s terms.
The net pay-off is large measured against the yardstick of any past or current reforms. It is affordable: the substantial gains represent net community benefits, year in year out, after accounting for all the costs including revenue impacts.
Most importantly, the benefits are widely shared. It is not a case of ‘trickle down’ economics. Australian workers will be the biggest winners – not foreign shareholders, not the banks, not other big businesses. Workers receive around two-thirds of the total gains through more jobs and higher wages.
These gains will only be achieved if tax cuts extend to large businesses. Larger companies pay two-thirds of company income tax and form the backbone of industries such as mining and manufacturing. They support thousands of regional jobs and small local suppliers and are the main driver of Australia’s employment growth.
Small businesses would also benefit most from across-the-board cuts because small and big businesses depend on each other. Business Council research indicates that the activity between businesses small, medium and large is worth around $520 billion a year.
Cutting the company tax rate for all businesses does not require a leap of faith. The evidence stacks up. It does require a leap of faith to believe that Australia can continue imposing globally uncompetitive tax settings without serious ramifications.
Choosing not to pass this Bill in full would be a decision to let Australia fall further behind and to give up on competitiveness and future prosperity.