The case for a company tax cut is rock solid - and Labor knows it

Bookmark and Share Economics & Deregulation | Chris Berg
The Drum 8th June, 2016

To read most election comment you'd be forgiven for believing that what was until very recently a bipartisan consensus - that there was a strong case for Australia's company tax rate to be cut - was in fact a mass delusion.

In 2010 Wayne Swan as treasurer declared that, "Reducing company tax will create new jobs and grow the economy right around the country" and was open to a reduction in the rate from the current 30 per cent to 25 per cent. Chris Bowen was arguing for a 25 per cent rate as recently as September last year.

But now that the Turnbull Government has announced a reduction to 25 per cent to be phased in over the next decade, Swan says there's "no case for a company tax rate" because multinational companies are avoiding their tax and to suggest otherwise has something to do with Margaret Thatcher and Ronald Reagan and "trickle-down economics".

For their part, Bowen and Bill Shorten now describe the 25 per cent rate as a $50 billion giveaway to big companies.

This is a rather damning indictment of the current Labor leadership, which has abandoned a long-held position simply to paint the Coalition as pro-big business during an election campaign.

Still, why blame a politician for acting like a politician? The populist argument against company tax cuts is just too easy to make. What's remarkable is not that Labor has reversed its view but that successive governments actually managed to reduce the company tax rate from 49 per cent in the late 1980s to 30 per cent today.

The case for a corporate tax cut is rock solid. It's about ensuring that the Australian economy is internationally competitive. A competitive economy attracts foreign investment - and with that investment comes growth and jobs. By contrast, an uncompetitive economy is a declining economy.

As the Rudd government's Henry Tax Review pointed out, in 2001 the OECD average corporate tax rate was 32.5 per cent. At that time Australia's 30 per cent rate was a good effort. But now the OECD average is about 25 per cent, and Australia's rate hasn't changed.

A word has to be said here about our system of dividend imputation. Under dividend imputation, investors receiving a dividend are credited for tax already paid on company profits. This avoids profits being taxed twice - first as company tax and then as personal income tax when dividends are returned to shareholders.

You often hear that dividend imputation makes the 30 per cent headline rate meaningless, as a reduction in company tax would be automatically made up by a corresponding increase in income tax collection. But that only holds true for domestic shareholders. Foreign companies have foreign shareholders who do not benefit from dividend imputation. And it is foreign companies we want to attract - along with their money and jobs and economic activity.

Indeed, the fact that we need a dividend imputation system at all partly demonstrates why the company tax is a bad tax. In truth no "company" pays tax. Companies are made of people and people pay tax - whether those people are company's customers, shareholders, workers or management.

Who ultimately pays what proportion of the company tax is a matter of great controversy.

Last year Chris Bowen accepted that the bulk of the company tax was paid by workers. If, alternatively, investors pay the bulk, then it's worth remembering that through compulsory superannuation we're all investors. If management pay the bulk - and you sometimes see arguments that the company tax is a de facto tax on wealthy managers - then it is a wildly indirect way of taxing the rich.

This confusion and complication is why every serious investigation into tax points out that the company tax is one of the most inefficient - that is, wasteful - taxes available to government. (See Chart 1.5 of the Henry Review.)

Yet Australia relies on this inefficient tax for its revenue (18 per cent of the total tax take as of 2013) more than any other OECD country (with the exception of Norway, where company tax provided about 22 per cent of the total tax take).

In that light, Wayne Swan is exactly wrong to argue that multinational tax avoidance means we shouldn't reduce the company tax rate. I've argued in the past that avoidance is for the most part a non-problem. But to the extent that company tax is being avoided, it is because other jurisdictions - like Singapore - offer much more welcoming tax environments than Australia does.

Our extreme reliance on company tax makes us particularly vulnerable to corporate tax avoidance and demonstrates how uncompetitive Australia has become for investment.

Labor used to understand this. Given how close they are to winning government, it's a real worry they no longer do.