Time for Parliament to act on company tax

The government has just introduced legislation to cut the company tax rate to 25% over 10 years.

This is a long overdue action, with the need for this reform pretty clear. Wages growth is weak, national income has been falling for several years, and productivity growth needs a substantial boost.

More troubling is our investment levels which are at near-record lows: the only other time we have seen non-mining investment this low is in the depths of the 1990 recession. And mining investment is declining sharply. These recessionary levels of investment should be a major concern to policy makers.

An important driver of investment is tax rates, and our company tax rate is uncompetitively high, even more so tax revenue. As a result, we are turning off investment, and are encouraging the decline in national income to continue.

The tax cut will help, boosting wages, exports, GDP, national income and employment, as explained in detailed Treasury analysis and affirmed by studies of real-world experience with company tax cuts.

Some argue this benefit isn’t large, but it is in fact quite substantial, as Treasury has argued: the gain to GDP is only slightly less than the benefit from all the major telecommunications, ports and rail reforms in the 1990s, which lifted GDP by about 1.25%. These reforms weren’t dismissed because they appeared negligible if spread over 20 years — and we should ignore similar arguments relating to company tax: of course any number is smaller if divided by 20.

We should also ignore complaints that foreigners benefit from the tax cut: Treasury argues there will be no long-term benefit to foreigners; and why should we reject a reform because both Australians and foreigners benefit? That would is a self-destructive policy.

Instead, the tax cut will make Australia much better off and legislation to implement the cut should be passed as a priority by Parliament.