Cuts are not deep enough

Australia finally has a corporate tax cut, after almost a year of acrimonious — even painful — debate. Numerous incorrect arguments against a tax cut were wheeled out by the usual suspects, and the  government appeared reluctant to defend their centrepiece tax policy.

These factors have meant we haven’t got the full tax cut yet: the cuts are restricted to businesses with turnover below $50m. Larger businesses will have to wait.

This is a worthwhile tax cut, but much less beneficial than a cut for all businesses. One estimate is the restricted business tax cut will increase GDP and national income by 0.2% per year when fully implemented. This is smaller than the boost from the full package, but it is still worthwhile.

There is also a downside from the tax cut not applying to larger business, because of the sudden increase in tax for businesses going over the threshold. This threshold will discourage business growth and encourage tax planning. In addition, we have had the recent passage of the Diverted Profits Tax, which may harm many multinationals operating in Australia.

As a result, the boost to the economy from the tax cut may be difficult to detect, making it even harder to argue the case for reducing taxes on larger business.

It was challenging enough arguing for a tax cut applying to all businesses; imagine how difficult it will be to convince the Australian public (and Senate crossbenchers) of the case for a tax cut just for larger businesses. This is despite the evidence, surveyed in last week’s Ideas@theCentre, that a tax cut for larger business will probably be more beneficial than a cut for small business.

So company tax may be frozen at the new rates, worsening incentives for small business growth and the competitiveness of larger business. In fact, we could well see the economy itself become frozen.