Media & Speeches

Company Tax Cuts are Needed to Supercharge the Economy

This opinion article by Jennifer Westacott was published in The Australian Financial Review on 20 November 2017.

The IMF recently confirmed what the Government and the Business Council have been warning since US President Donald Trump vowed to cut company taxes, investment funds will be sucked into the US from global markets on a massive scale.

It would be foolish to think Australia will be quarantined from such an enormous relocation of funds.

The IMF modelling highlights the risks. It shows that if the US, Germany and France implement their business tax cuts Australia could forfeit $8 billion of new investment a year.

Put another way, this is roughly the same investment impact as Australia increasing its company tax rate to at least 35 per cent, or the equivalent of our nation having the highest company tax rate in the OECD.

In this situation, a 25 per cent tax rate would merely maintain our current unacceptable uncompetitive position, not improve it.

It beggars belief then that the Senate continues to oppose extending gradual tax cuts to bigger businesses.

At home we are seeing the faint glimmer of an economic turnaround.

After more than three years of declining business investment, it is encouraging to witness some improvement in the last three quarters.

But it would be folly to assume these tentative green shoots mean a competitive company tax rate is no longer a priority.

With tax cuts imminent in the US and several other economies, Australia must get out in front.

After striking bipartisan agreement on how to work through Federal Parliament’s dual citizenship issues and a process underway to determine the next legislative step in the marriage equality vote, it is now time to re-focus on revitalising the economy.

Wages growth is stubbornly low, and will continue to disappoint without stronger investment and productivity growth.

We need annual economic growth of 3 per cent, not last year’s 2 per cent, to deliver the steady improvements in living standards Australians expect.

While we see some green shoots in the economic data this should be a call to action, not complacency. These positive signs should be the impetus to put our foot on the economic accelerator, lock in and solidify economic growth.  

 The simple, but confronting, arithmetic shows delivering GDP growth of 3 per cent and national income growth per person at its long-run average of around 2 per cent will require annual labour productivity growth to increase to around 2.5 per cent.

It is no easy feat. For the last decade, average labour productivity growth has been languishing below 1.5 per cent and fell 0.5 per cent through the year to June 2017.

Achieving 2.5 per cent will require a sustained resurgence in private sector investment and greater innovation and competitiveness across businesses.

If we are committed to improving living standards for all Australians, we must get serious about making higher productivity growth a reality.

Our tax rate is not the only impediment holding back investment and productivity growth but it is a critical part of the investment equation. It is vital our rate is globally competitive.

What’s more there is a proposal on the table for action – the Government’s Enterprise Tax Plan.

The Business Council supported company tax cuts being phased in for smaller businesses. But for the economy to reap the full benefits tax cuts must be extended to larger businesses that undertake the lion’s share of investment in the country and pay two thirds of all company taxes.

Treasury modelling, which accounts for dividend imputation, estimates a tax rate of 25 per cent for all businesses would permanently boost investment by 2.6 per year, GDP by 1 per cent  - $17 billion in today’s economy – and national income by 0.6 per cent.

Tax revenue would also rise in line with a bigger economy – by around $4 billion – giving us greater capacity to reinvest in the services people need and sustain our social safety net.

Those saying we can’t afford it are ignoring what the modelling is telling them.

They misleadingly compare a 10-year budget impact of $65 billion (in nominal dollars) with a single year of net economic benefit of 1 per cent of GDP ($17 billion in today’s terms).

They apply a level of interrogation to this proposal to which they simply don’t hold any other.

When you look at the benefit over ten years the total GDP payoff is $170 billion in today’s dollars.

But, the really critically point, is that the modelled annual pay-off of 1 per cent of GDP is a net benefit - that is, the economic boost after subtracting the costs.

The modelling tells us a company tax cut delivers a higher pay-off than other ways of using the same taxpayers’ dollars. This is because our high company tax is a significantly distorting, inefficient tax.

The tax cuts would deliver more jobs, higher wages and higher tax revenues than we are getting from other current uses of these funds.

So, when opponents reject a fairer, more competitive tax system as unaffordable, what they are really saying is they want to spend the money on something else and forgo the substantial benefits.

That’s fine if they can demonstrate that applying $65 billion of revenue over ten years to an alternative program would deliver an economy the same multiple benefits – a 1 percent boost to our GDP, about $4 billion in additional revenue a year, and higher productivity  – the essential pre-condition for wages growth.

They haven’t and they can’t.

Unleashing economic growth is not “trickledown” economics - the throwaway line de jour.

 There is nothing trickledown about policies that reduce barriers to business investment.  Business investment growth, by driving higher labour productivity, has been the major contributor to higher per capita real incomes across the Australian community over recent decades and will almost certainly remain so going forward.

Implementing the remainder of the Enterprise Tax Plan will deliver much more investment by larger companies across the economy, large businesses employing 3.5 million people. Listed companies that are owned by almost 6 million shareholders outside superannuation funds.

The fact is there is a straight line from increased business investment to higher productivity to higher incomes for workers, whatever the driver.

Two-thirds of the benefits from reducing the company tax rate to 25 per cent flow to Australian workers and households.  What’s trickledown about this?

The only trickle is the slowing drip of responsible policy decisions.

Australia’s competitiveness is being allowed to fall further and further behind for no other reason than politicians wanting to play politics.

It is especially galling when the same politicians bemoan sluggish wages growth and regions declining because of a lack of investment while they have never put an alternative on the table.

If not this, what?

We can but hope that they act responsibly, seizing the opportunity to do something positive for all Australians by supporting the Enterprise Tax Plan.