The case for a cut in company tax

The evidence is in: company tax harms investment, innovation, and entrepreneurship – and even reduces wages.

Not that you’d know this from reading some stories this week, which claim advocates of company tax cuts had avoided using evidence. This seems to be wilfully ignoring the strong evidence that is in the public domain, and has been discussed at length by advocates of lower company taxes.

Firstly, we have the final report of the Henry Tax Review, released in 2011, which noted company tax was a tax on investment, and that:

Reducing taxes on investment would increase Australia’s attractiveness as a place to invest, particularly for foreign direct investment. Reducing taxes on investment, particularly company income tax, would also encourage innovation and entrepreneurial activity. Such reforms would boost national income by building a larger and more productive capital stock and by generating technology and knowledge spillovers that would improve the productivity of Australian businesses and employees.

Next we have statements by the Federal Treasury. The Deputy Secretary of the Revenue Group, Rob Heferen, has said this year that our company tax rate is “high by global standards”, imposes substantial costs on living standards and causes reductions in investment. Research by Treasury indicates that company tax is one of the most inefficient taxes – in fact, the most inefficient tax raised by the federal government; and another Treasury report finds around two thirds of the benefit of lower company taxes goes to households, mainly through higher wages.

In addition, PricewaterhouseCoopers has just released a report arguing that a company tax cut will result in enough economic growth for the government budget to be ahead within five years. International evidence is along these lines as well. An OECD report has found that taxes on companies were the most harmful to growth out of any tax studied. A recent major review of taxes in the United Kingdom, the Mirlees review, reached similar conclusions.

And importantly, the ALP has stated that company taxes should be cut and similar statements have been made by ACOSS. These are unequivocally not the views of sectional or biased business interests.

Of course, business groups have mounted similar arguments – but their arguments shouldn’t be dismissed solely due to self interest, particularly when they are supported by the strong evidence cited above.

Nevertheless, all this context was missed by some commentators. Instead, they state that the only real argument put for a company tax cut is that the current 30% tax rate is uncompetitive — and then respond to this proposition by arguing that our tax rate is equal to, or even lower than, comparable countries.

Even if all the evidence cited above is ignored, and we focus only on competitiveness, the case for company tax cuts still stands. It is easy to compare Australia to one or two other countries with higher tax rates – but this is just as easy as comparing to countries with lower tax rates. Australia’s company tax rate is below the US rate of about 39%: but equally it is above the 25% rate in China. And China’s economy is about the same size as the US economy (depending on how you measure it).

We could go through individual countries explaining why they have lower or higher tax rates: but this is the wrong approach. Rather than picking individual countries, averages are better. And Australia’s company tax rate is above the average for the developed world (a point repeatedly noted by the Treasury), above the average for our region, and we are well above the global average of 23.7% according to a recent report by KPMG.

It has been argued that our effective company tax rate is lower than 30% because of the imputation system, which reduces tax for Australian shareholders. But this is a furphy, as investment by foreigners into Australia is much more responsive to after-tax returns, and imputation provides little benefit to foreigners.

So based on international comparisons alone, there is a clear case that we should have a company tax cut.

Commentators also argue that Australian companies are avoiding tax by shifting profits offshore to tax havens. There might be concerns of tax avoidance by individual companies, but overall tax revenue tells a different story: total Australian company tax to GDP is at high levels, both historically and compared to other developed countries.

However, these details — international comparisons and tax to GDP ratios — aren’t the main issues with company tax. As noted above, more important is that company taxes are inefficient, harming growth, innovation, investment and productivity. They should remain a key priority for tax reform in the context of our current sluggish rates of investment and growth.

Michael Potter is a Research Fellow in the Economics Program at the Centre for Independent Studies.