Flat White

Put company tax cuts back on the table

19 February 2019

7:25 AM

19 February 2019

7:25 AM

If Scott Morrison wants any chance at re-election, he can’t simply stay on the backfoot, opposing Labor’s shameless tax hikes on retirees, aspirational investors, single women and widows. Instead, he must move forward to defend the principles and policy that the Liberal party stands for. And that’s why  business tax cuts should be back on the agenda

Despite opposition success against the Turnbull government’s originally planned company tax cuts premised on ‘class war’ rhetoric, the evidence is that further company tax cuts are likely to enrich Australia. An OECD report establishes that when it comes to driving away growth and foreign investment, high corporate taxes, like Australia’s whopping 30 per cent, are more damaging than any other form of taxation. This is bad news for us as our rate is well above the OECD average of 22 per cent and higher even than the 27 per cent average of the G7 – the world’s seven biggest economies. By stubbornly holding onto such a high rate, we not only avoid international best practice, but place a handbrake on our own prosperity by limiting the ability of businesses to hire more Aussie workers, invest in training and development or expand operations.

With that said, it’s tempting to argue that Australia’s company tax rate doesn’t need to be cut since we’ve experienced strong economic growth despite it for a while now. While this may have been true, times change and taxes have to change with them. In 2000, Australia’s 30 per cent company tax rate was somewhat lower than the 32 per cent which was average among advanced economies.

Today, Australia is on the wrong side of that average and growth is slowing. Two of the only major nations with higher company tax rates – France and the United States – recently legislated new rates below ours. Major companies are already considering a shift in their headquarters or main operations to competitors in the Asia-Pacific region such as Singapore, which maintains an 18 per cent rate that is attractive to investors.

Admittedly the Coalition policy of tax cuts for all business was amended to exclude big business after its original iteration was shot down by the Senate. However, the intended message was crystal clear – that cuts mean growth, growth means jobs, jobs are good.

By contrast, Labor seems entirely unsure about what they’re even trying to achieve. They first endorsed the cut for small business, declared they would repeal cuts for small to medium businesses, then back-flipped on this stance days later. They remain steadfastly against any cuts for the biggest companies in Australia, even though the inconsistent approach which discriminates against businesses based on size only discourages them from growing and thriving. It seems the ALP either do not know if tax cuts promote growth, or do not know if they like growth. Neither possibility signals confidence in their economic leadership.

While claims that company tax cuts are a “handout” to big business are manifestly false as they merely allow companies to keep more of their own money, opponents of company tax cuts in Australia are nonetheless correct in nothing that they will strongly benefit foreign investors. This is because Australian investors already enjoy tax refunds to compensate them through our dividend imputation system. However, opposition on this basis is misguided due to our economy’s strong reliance on foreign investment and the necessity of ensuring that we remain a competitive place to invest in if we plan to grow and innovate to keep up with the world.

Furthermore, company tax cuts still benefit Aussie investors as the current system effectively acts as a ‘withholding tax’. Even with refunds through dividend imputation, every dollar initially taken as tax from a company here is one which can’t be kept to earn a rate of return within the company. As a result, there is less cash to go around when the company does distribute a dividend. Both the dollar taken in tax and the rate of return it would have accrued disappear. Refunds on franking credits provide no compensation for this rate of return. This means that Australians investing in Aussie equity are disadvantaged and a company tax cut remedies this problem.

Australians can be rightfully pleased with our record-breaking decades of growth in our economy which have been a good thing for all of us who form part of it as employees, employers and consumers. Constant vigilance in keeping up with global phenomena, and adhering to sound economic principles, is the only way that we’ll continue to grow and support ourselves as a nation.

Labor has succeeded in virtue-signalling to the electorate about wanting to take more from small businesses which succeed and become large, and from discouraging foreign investment through maintaining a populist revenue grab from the investors. It’s time for the Liberals to stiffen their sinews and call the Shorten team out for being the rank opportunists they are. They can start by standing by the original company tax cuts.

Eliot Metherell is a Research Associate with the Australian Taxpayers’ Alliance.

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