The time to cut Australia’s company tax rate is now. The key missing ingredient for our economy is business investment. A company tax cut can drive that needed investment and with it can come the jobs, innovation, competitiveness and confidence we all need.
Ideally, such a tax cut should be included in the Budget to take effect from July 2016. If not, at the very least, business will be looking for a clear timetable for future business tax reform.
Once the Budget has been delivered, in all likelihood we will move quickly into election mode and we don’t need another election campaign demonising business – those who create the jobs – and we don’t need more claptrap about business not paying its fair share.
The reality is that we are uncompetitive when it comes to company tax rates. Our headline rate has not shifted in a decade and half. In that time, other OECD countries – and particularly small and medium-sized OECD members – have cut their rates.
For all the uninformed commentary about the differences between the headline rate of company tax and individual companies’ effective tax rates and despite the flurry of publicity associated with the leak of information about the use of tax havens, Australian business as a whole continues to contribute a higher share of tax to GDP than every OECD country apart from Norway.
Our economy, according to national accounts data, is attempting a gradual rebalancing act. To date that is happening in spite of the drought in business investment. It has come from greater residential construction; from a boost to dollar-sensitive manufacturing and services exports and, most recently, from a drop in the household savings rate and a tick-up in public investment.
The missing link, and the one most necessary if we are to accelerate and sustain the rebalancing of the economy, is business investment. The best way to drive business investment? Cut the company tax rate.
Other tax changes that get thrown around from time to time might sound more politically sexy but the reality is they won’t drive the long-term sustainable growth we desperately require.
The sluggishness of business investment is much more than just the slowdown of investment in mining and energy-related projects. Alongside this wind-back from historic highs, business investment in the non-mining sectors has failed to recover from an extended slump.
This investment slump has two implications. Both hurt national competitiveness and hinder the critical rebalancing of our economy.
The first is what might be called “capital-shallowing” – a productivity-sapping decrease in the amount of capital per employee. The second is the ageing of the capital stock so that we are short on the most recent generation of improvements in the quality of capital employed. The investment deficit is in both physical and intellectual capital.
We hear a lot from all sides of politics about the innovation imperative and how we need to adapt and be agile. This is most certainly right. But innovation is not just something that happens in high-tech start-ups; it happens wherever businesses take a risk with new services, products and processes, new marketing channels and new business models.
However, none of this happens without investment and cutting the company tax rate would be one of the most decisive steps we could take to improve incentives for private-sector innovation.
Improving incentives for investment and innovation would drive substantial benefits for the Australian economy. In a world of international competition for capital looking for investment opportunities, Australian investment would become more attractive both to domestic and global businesses. More capital would flow into Australia and domestic businesses would have greater incentives to retain profits and invest in new domestic opportunities.
Greater levels of investment would lift the quantity of capital per worker and, just as importantly, would improve the quality of the capital stock as more modern capital equipment and more recent advances in intellectual capital were introduced. The resulting, much-needed boost to productivity and competitiveness would in turn lift the demand for labour and the capacity to raise wages and create more jobs.
While both business investment and the pace of innovation would lift in reaction to the reduced company tax rate, these are just the first-round effects. As shown in numerous studies, a large share of the benefits would be spread broadly across the economy – largely through favourable impacts on the labour market with higher wages and faster jobs growth.
In the upcoming Federal Budget the Government should, at minimum, bring the general company tax rate into line with the 28.5 per cent rate that applies to very small businesses. Our ambitions should go further than this and we should also develop a clear plan to get the company tax rate to the more internationally competitive level of 25 per cent over the next three to five years.
Simultaneously, we should investigate the full range of options that would allow us to cut our company tax rate more substantially – say to 20 per cent – to position us much more convincingly as a leading destination for mobile global investment.
We can’t tax our way to prosperity. And we can’t over-tax our companies if we want to get the prosperity we need to sustain further rises in Australian living standards.