Australia’s corporate tax regime is very successful at raising revenue and also at escaping any serious scrutiny. Serious debate about Australia’s corporate tax rate is long overdue, and the Ken Henry review released yesterday is a good start.
This financial year, the corporate tax is expected to raise $73.5 billion, or nearly 34% of income tax revenue. While personal income tax reform has been the subject of an ongoing public debate, there has been little demand for corporate tax reform. Arguments by the Business Council of Australia (BCA), for example, that corporate taxes are too high have been viewed as special pleading by lobby groups.
The Australian corporate tax rate is high by both world and OECD standards. Ireland is an example of a country that has made radical changes to its corporate tax rate and massively improved their corporate economy. The Australian corporate tax take is high by OECD standards. In 2005 the corporate tax take was 5.9% of GDP compared to the OECD weighted average of 3.2% of GDP. This, however, is not due to so-called “tax competition” driving corporate tax revenue down. In fact, OECD data shows that corporate tax revenue has tended to rise over the last 30 years even as rates declined. This is not just a Laffer-curve effect at work—cuts in headline tax rates have been accompanied by base-broadening.
Populist opinion suggests that large corporations pay very little (or even no) corporate tax. ATO data shows the exact opposite; large corporations, which make up less than 0.5% of all firms, pay over 75% of corporate tax. To provide a starker statistic, Tax Commissioner Michael D’Ascenzo recently indicated that “large corporates with a turnover of $250 million or more contributed 65% of company tax in 2006–07. And of this, the top 50 contributed 71%, and the top 100 companies contributed 82%.” The Australian corporate tax burden is highly concentrated on a relatively small number of firms.
It could well be argued that those firms earn the vast majority of profits in Australia, and consequently it is unsurprising that they should pay much more in corporate tax. I tested that argument by calculating their share of total income and taxable income, and comparing that with their net tax share. In 2005–06, these firms earned 55.37% of total income and 73.11% of taxable income while paying 75.6% of net corporate income tax. The corporate income tax is not as distorted as the personal income tax, where the top 1% of taxpayers earned 9.4% of taxable income and paid 16.5% of net personal income tax.
The BCA have argued that the corporate tax burden has increased over time. In the 2007-08 Budget Papers the government argued that “economic profit” in the economy has increased. In their view corporates are paying more tax because they are earning more profits, and that is how the system is designed to operate. Unfortunately, the government have not released sufficient detail to fully evaluate that claim. A 2004 paper Treasury, however, made no mention of “economic profit”; rather they indicated that the corporate tax base has been broadened.
In my analysis I show that the effective corporate tax rate has increased over time. In other words, while the nominal corporate tax rate has fallen, so the corporate tax base has expanded. This has lead to the corporate tax burden increasing in Australia – consistent with the BCA argument and the 2004 Treasury paper. Those more innovative entrepreneurial sectors of the economy are suffering under a higher tax burden and government is wrong to simply dismiss their claims.
There is a large and growing economic literature that suggests that the corporate tax burden should be lower rather than higher. Young Lee and Roger Gordon found a consistently negative relationship between corporate tax rates and economic growth. A 10% decrease in the corporate tax rate can be expected to increase subsequent economic growth by between 1% and 2%. In a 2008 World Bank draft paper, Simeon Djankov and his co-authors reported that corporate taxation has a huge impact on the economy. Higher corporate taxes reduce aggregate investment, foreign direct investment, and entrepreneurial activity, and increase the size of the informal economy.
We have heard a lot about corporate tax revenue. Most Australians do not realise how few corporations actually contribute to the bulk of that revenue. Fewer still recognise the high economic cost associated with it. Corporate tax reform should be high on the “to-do” list, not rejected as mere special pleading.
Professor Sinclair Davidson’s paper The Faulty Arguments behind Australia’s Corporate Tax is published by the Centre for Independent Studies online at www.cis.org.au. His research into Australian corporate taxation is supported by the Australian Research Council.