Corporate Tax Policy

Policy
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Continuing the discussion from Tax & welfare policy (v2.0):

Hi All

I’ve started this new thread to follow on from the Tax and welfare discussion as it was last active September last year.

I’m fairly new to the party and I’ve got a strong interest in tax reform so I wanted to throw a couple of ideas out there and see what people thought. Let me say from the outset, I understand one of the overall objectives of this party is to reduce the complexity of the tax and transfer system to reduce bureaucracy and compliance costs and none of my ideas conflict with that.

To start with, I’d like to suggest a minor change to our policy on the corporate tax rate. Basically, I think we should be aiming to lower it even further than we currently are.

In the party’s tax policy document, it states that we should support moves to a corporate tax rate, lowering it from 30% to 25%. I would suggest going even further, aiming for a corporate tax rate of 22%. Currently, the OECD average is 25% and by the time any corporate tax reform in Australia is passed, the OECD average is likely to be even lower as most advanced countries are moving to reduce corporate tax rates. Additionally, our competitors in the Asia Pacific region have an average corporate tax rate of 23%. Other countries like Ireland and Singapore have much lower corporate tax rates and even traditionally high taxing countries are moving in this direction. The UK for example, is moving to an 18% corporate tax rate by 2020.

High corporate taxes hurt economic growth and prosperity. Numerous modelling both from the private sector and the government has indicated this. In 2014, Treasury found a company income tax cut from 30% to 29% would increase the level of national income by between 0.15% and 0.35% in the long-term.

Taking another example, modelling by KPMG on a cut in Australia’s corporate tax rate from 30% to 22% indicated the following:
-Rise in investment of 4.1%
-Capital rises 4.3%
-Employment rises 0.4%
-Productivity rises 1.7% (largely through increased capital-labour ratio)
-Real wage rise 3.8%
-Overall this leads to higher industry output and annual GDP 2.1% higher in the long run

KPMG modelling

Uncompetitively high tax rates mean that otherwise profitable investments do not take place - reducing growth and productivity and encouraging business to move activity offshore. With increasing mobility of business and capital, this is a huge problem. This has been shown over recent years in Australia. Private business investment has slowed. For the last three years non-mining investment has been around 4 per cent of GDP, the lowest in over half a century, and innovation-led productivity growth has stalled at less than 0.5 per cent.

BCA Submission

'… corporate taxation affects performance particularly in industries and firms that are likely to add to growth.'
OECD, Tax Policy Reform and Economic Growth, 2010

Additionally, corporate taxes tend to be passed on to consumers and workers and with the mobility of capital, tend to drive companies offshore. As former Treasury Secretary Ken Henry has stated:
‘… the consensus of public finance theorists is that in Australia if the company income tax were to be cut, the principal beneficiaries will be workers. They would be the principal beneficiaries.’
(Ken Henry, comment on Day 1 of Tax Forum, 4 October 2011)

Treasury has modelled the long-run welfare effect of a cut in company tax, showing only around one-third of benefits from a tax cut go to shareholders, with two-thirds flowing to families, primarily through higher wages.

Other treasury modelling including the Henry tax review showed that corporate tax rates hurt the economy more than most other taxes through a higher marginal excess burden. Modelling in the recent Treasury tax discussion paper found that for every extra dollar of revenue raised through corporate taxation, 50 cents of economic loss occurs. This contrasts with a marginal excess burden of about 20 cents per dollar for a flat rate income tax or broad based GST.

Better Tax Discussion Paper

The other benefit of a cut in corporate taxes is that it doesn’t cost as much as people think. Due to the effect of dividend imputation and the interaction with the income tax system, part of the cut in corporate taxes is automatically offset.

Modelling by Deloitte found a cut in the corporate tax rate from 30% to 25%, after the effect of dividend imputation credits was taken into account, would cost $7.2 billion to the budget in 2016-17.

Deloitte submission

Modelling by KPMG looking at a cut in the corporate tax rate from 30% to 22% showed an initial hit to the budget of approximately $20.4 billion annually, however, this is partially offset by higher income tax revenues resulting from reduced dividend imputation credits ($8.6 billion) – meaning a total hit to the budget bottom line of just under $12 billion dollars. Their modelling did also indicate that over time, increased economic growth and employee wages would increase personal income tax collections by up to $15 billion over baseline, almost completely negating the tax cut. This gain would however be partially offset by an increased government wage bill to keep pace as private sector wages increased due to the tax cut. In short, they found the actual cost of a significant cut in corporate taxes to be much less than it would appear on face value after the effect of dividend imputations and increased growth in wages was taken into account and would deliver real growth benefits to the economy in general, but principally to workers.

KPMG modelling

I think our objective should be to promote growth by advocating a corporate tax rate of about 22%.
This would bring us under the OECD average and put us slightly ahead of our Asia-pacific competitors. As a small, open economy, it is crucial to stay ahead of our competitors rather than lag behind.

There may of course be political opposition to a tax cut for “the big end of town”. However, it would be important to emphasise that this tax cut would also benefit small businesses. It is often quoted by politicians that two thirds of job creation is by small business in Australia. Perhaps they deserve a tax cut for generating all these jobs and to allow them to generate even more? And as the evidence listed above indicates, corporate tax cuts would deliver most benefits to the overall economy and workers, rather than shareholders in large businesses.

Further, as a party, if we are to pursue evidence-based policy, the evidence is fairly overwhelming that a cut in the company tax rate is crucially important to drive growth and improve competitiveness. All treasury modelling indicates that with the exception of stamp duty (which we have already stated needs to be abolished altogether), company tax is the next most harmful tax to our economy. I think we should aim for Australia to not just catch up to the average OECD corporate tax rate, but to be better than average and more competitive than our Asia-Pacific neighbours.

I’d be interested to hear people’s thoughts.

Jason

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If we gave company tax proposals more prominence I think we’d also have to give them more voom. One option would be to cut it down to 15% but also ditch dividend imputation (weirdly, that would almost certainly lead to more actual revenue than we get from company tax now).

Or ditch company tax altogether and substitute a kind of corporate commons fee/market capitalization tax which charges firms a tiny fraction of their share price in exchange for access to the share market (which is publicly funded infrastructure after all).

The risk is of creating a policy that offends some members or is hard for candidates to explain. But we always have good policy debates. Are you in Sydney? We’ve got a monthly meetup coming up soon.

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I don’t like any policy that reduces the overall tax take. We will most likely need more money to implement our platform than is currently being taken by the state. We need to fund better education, science, health and welfare, all of which rates in my mind as being many times more important than a tax cut for corporations.

Where would the money come from? Higher taxes from income tax? Even less services?

If we can come up with an equitable way to pay for the tax cuts and not just shift the burden from rich to poor, I could be convinced it is a good idea.

I am not interested in the Party buying into the game being played by the major Parties where they are relentlessly focused on tax cuts and subsequent cuts in services. The state must act to ensure the well-being of its citizens or it has no legitimate purpose. The shift in power towards governments serving the interests of the rich against the rest of the population is damaging democracy.

Massive donations are buying the legislative agenda. Village Roadshow etc are donating $100,000’s to both major Parties to buy website blocking, graduated response etc. Mining companies get billions of dollars in tax breaks whilst donating to their mates in parliament. The TPP is a sterling example of this, where democracy is being consciously undermined by secret trade deals where it is virtually impossible for ordinary people to get a seat at the table.

Where does it end? If we reduce our corporate tax to 22% other countries may think it is a good idea and reduce their corporate tax to 15% then we are once again high taxing and there is more pressure to reduce the corporate tax take even further.

To continue to reduce the over-all tax take is damaging to the social fabric. If you want to see what the end game of this agenda looks like, you just have to look at the United States. Decaying cities, massive social dislocation, an uncaring government that is more interested in enriching donors than looking after the little guy. Trump is cashing in on the fear being felt by the middle-class, who is suffering under relentless austerity and scared of the future because it looks even bleaker than today. This must stop.

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Its wrong to compare a countries corporate tax rate without looking at other taxes that apply in those countries.

eg. Some countries have a lower company tax but a 20% GST/VAT, so they arent taxing production as much, but they are taxing consumption more.

I dont think we should support a tax policy that increase the gap between rich and poor, so i dont agree with our current policy to reduce it to 25%.

Australia has a low overall tax rate already.

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Hi All

I completely understand the other views on this issue. Cutting
public services to fund tax cuts for large corporations was certainly not my
objective at all. Myself and my close family members are employed in the public
health and education systems so please believe me when I say I have absolutely
no desire to cut public funding to health and education. Quite the opposite – I
feel public funding, particularly for education, is essential and ideally should
be increased. My view is education is in many ways a silver bullet policy area

  • providing enormous benefits not just to the individual but more broadly in
    terms of greater economic growth and prosperity, reducing poverty, reducing
    crime, improving public health, etc.

My suggestion was really more about shifting the tax mix to
taxes that are less harmful to economic growth so that we are in a better
position to fund things like education spending. The annual average rate of
real government spending growth was 3.6 per cent over the last decade, compared
to real GDP growth of 2.7 per cent. Total spending today is almost 26 per cent
of GDP, just shy of its post-GFC stimulus peak. The only way we can sustain
spending increases on public services is to increase our GDP growth and a big
part of that is the competitiveness of our tax system.

Basically I’m suggesting that the benefits of a corporate
tax cut would largely fall on workers and families. In addition, the “cost” of
the tax cut would be largely offset by the effect of dividend imputation/income
tax interaction in the short term and would be further offset in the medium to
long term by the increased tax revenue generated by the extra economic growth. Raising
taxes to pay for tax cuts to generate net economic gains where the economic
cost of the taxes being raised is lower than the cost of the ones being reduced
makes sense. The figures from treasury regarding the excess marginal burden of
corporate tax support this, as the other modelling listed in my previous post.

I also take your point that if one country lowers its
corporate tax rate, others may follow suite and get into a kind of “race to the
bottom” – a problem identified in the Henry tax review and specifically
recommended against. That said, other nations have already realised the
benefits of lower corporate taxes and are moving in that direction. My
suggestion wasn’t to go radically further than others, just to bring us more or
less in line with the average in the Asia-Pacific region, which for a small,
open economy dependent of foreign investment for growth, such as ours, seems
absolutely essential.

The governments rationale for the last corporate tax cut
(many years ago now) was to be ‘internationally competitive and bring Australia’s
rate more into line with the rates of other countries in the Asia Pacific
region’. At that time, the OECD average was 35 per cent compared with Australia’s 36
per cent. When Australia’s
rate reached 30 per cent, the OECD average was 32 per cent. The OECD average reached
30 per cent in 2003 and has fallen below the Australian rate thereafter, now
down to 25%.

I think it makes economic sense to advocate for a lower
corporate tax, and I think it is in line evidence-based policy formulation. I
also think that it could be marketed successfully politically as “pro growth”
and “pro small business”.

But as always, happy to hear different points of view!

Jason

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Hi MarkG

Realised I hadn’t replied to your post. A 15% corporate tax would definitely be a big policy. I think it would be awesome for growth and investment. I’d have to look at the numbers regarding dividend imputation but if there was a way of doing it that was close to revenue neutral I’d probably be all for it. Alternatives to corporate tax in general would also be interesting (as you suggested). This was raised as a possibility in the Henry tax review.

Regarding a corporate tax rate of 15% by abolishing dividend imputation credits, my concerns would be:

  1. All the submissions to the tax discussion paper I read advocated keeping the current dividend imputation credit arrangements. The Henry Tax review did also (in the short term) - although it left scope to change these arrangements in the medium term. I’d have to look at the detail!
  2. With such a low corporate tax rate, I’d be concerned about people structuring their income through companies/trusts to avoid income tax. Strengthening regulations to prevent this may increase complexity and bureaucracy, creating more dead weight costs and waste.

But would certainly be up for discussing it further. Unfortunately, I’m not in Sydney - I’m in Brisbane so might have to be done through these forums.

Jason

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There is a “fact check” regarding this topic at The Coversation, mentioned imputation credits etc.

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The dividend imputation aspect of this issue is really a double edged sword.

There are arguments in favour of dividend imputation – which is why it was originally brought in.

The detail is covered well in section 5.2 of the recent Tax Discussion Paper.
Tax Discussion Paper

It can be argued that it does prevent unfair double taxation of resident shareholders on income from Australian shares, it may reduce company bias towards debt rather than equity (possibly contributing to the stability of the economy) and creates an incentive for Australians to invest more of their savings in Australian shares rather than foreign companies. Imputation also reduces the bias that exists in some classical tax systems towards companies retaining their profits, rather than distributing them to shareholders as dividends.

While the FactCheck article correctly makes the point that most other OECD countries have moved away from dividend imputation, the vast majority use a number of alternative approaches to relieve the impact of double taxation of corporate dividends (see table 5.1 in the Tax discussion paper for details) so it’s not like Australia is out on its own in this area.

In any event, the important thing is that imputation credits are not available for use by non-residents, therefore it makes little contribution to attracting foreign investment to Australia. The headline corporate tax rate is more important in terms of attracting more foreign investment and thereby increasing productivity and boosting economic growth.

Whether you agree with dividend imputation or not, one handy advantage, as described in my previous post, is that any reduction in the headline corporate tax rate would automatically be partly funded due to the effect of less dividend imputation credits, making such a reduction more easily achievable. In addition, increased economic activity from new business investment in response to a corporate tax cut generates additional tax revenue. Modelling undertaken by the UK Treasury Department indicates that, for the UK, between 45 and 60 per cent of the cost of a corporate rate cut will be reduced in this way.
HM Revenue & Customs Analysis

The combination of the two effects in Australia will go some way towards a corporate tax cut paying for itself.

So really whether we retain dividend imputation or move to one of the other systems used around the world to prevent full double taxation of dividends, there is still a convincing case to reduce the headline corporate tax rate.

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If you’re genuinely interested, this is probably the best argued proposal for cutting tax down and getting rid of dividend imputation. My concerns aren’t really with the merit of the idea- it’s more with the risks of burdening our candidates with ideas that are quite complex and not really clearly connected with the core ideas of the party.

I’ll grant you that what we call corporate tax is mostly a tax on wages. It’s something we could discuss at Congress if you want to raise it.

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Hi Mark

Thanks for the link to that analysis by CEDA – was a very interesting read and gave a pretty compelling argument for ditching dividend imputation in favour of a large cut in corporate taxes. The submission by the Australian Industry Group to the recent Tax Discussion Paper alluded to this approach as well, noting that the current imputation system may act as a deterrent to foreign investment.

I love the idea that we could drop the rate down to half the current rate of 30% and fund it by cutting out dividend imputation credits altogether and combined with the extra revenue generated by the growth dividend of the corporate rate cut, this would probably be revenue neutral and would give Australia one of the lowest corporate tax rates in the OECD. Surely be a big boost to growth, investment and, most importantly, real wages!

What would your thoughts be on adopting that as part of the party’s tax policy?

My concern is it means dividend income would effectively incur double taxation, although at a lower corporate tax rate. In relation to this, what do you think about one of the other proposals out of the Henry tax review - applying a uniform 40% discount to income earned from investments, savings, capital gains, rental income and dividends? The Henry review proposed not applying this to dividend income because they recommended retaining imputation, but if that was to be abolished this income should presumably also be included in the discount.

Looking at what other countries do regarding taxation of dividend income, the recent Tax Discussion Paper noted:
“Under most alternatives to dividend imputation, a typical feature of the taxation of
dividends is to provide double taxation relief, either through a discount or a low flat rate.”

The Henry review gave a detailed analysis of the rational behind this dual income tax system (one rate for labour income one for capital/investment income) and the benefits of such a system, related to the relative mobility of labour vs capital, the tax wedge caused by deferred consumption in favour of savings, etc. They concluded:
“Comprehensive income taxation, under which all savings income is taxed in the same way as labour income, is not an appropriate policy goal or benchmark.”

There appear to be good arguments for the benefits of implementing such a dual income tax system of this nature – with a discount on the rate of taxation on capital/investment income compared to labour income encouraging savings, decreasing double taxation etc. One of the most compelling arguments seems to be that this would at least partially compensate for the taxation of nominal income instead of real income (due to the effects of inflation). Again, several other analysis have supported at least further examination of such an approach, including by the Australian Industry Group.

Other groups also supported such a proposal, including the Business Council of Australia.

Regarding savings income – the effect of inflation increases the effective marginal tax rate significantly, and this disproportionately affects low income earners compared to high income earners.

Regarding dividends, as stated above, it would go some way to relieving the double taxation on dividends after the removal of imputation credits.

Regarding rental income, I note the pirate party’s policy of abolishing negative gearing for investments. I completely agree with this policy, and implementing a 40% discount on taxation of rental income would go some way to ameliorating this change and encouraging investment in rental properties (although not at the current excessive and highly geared rate). Several recent analysis of the tax system including the effect on the housing market recommended either restricting or completely abolishing negative gearing, and several others including this good one by Deloitte recommended reducing the current 50% capital gains tax discount. This could be cut to 40%.

Regarding capital gains, there are numerous arguments of which I’m sure you are aware against high capital gains tax. Several good arguments are listed below but one of the most compelling is that the lock-in effect of the tax decreases productivity by encouraging firms/individuals to hold onto less productive assets instead of investing in more productive assets. In addition, several studies suggest that a higher capital gains tax rate actually doesn’t raise more revenue because it discourages sales of assets so less gains are crystallised and less revenue raised.

Forbes

CATO

By implementing a uniform 40% discount on income from savings interest, rental income, dividends and capital gains, all investments would be treated as neutral and economic distortions would be minimised, as well as providing a means of adjusting for the effect of inflation. This would make the tax system more equitable the it is currently, in which high income earners can negatively gear to reduce their tax whereas lower income earners are taxed at their full marginal rate on income earned from interest on savings.

If we applied a 40% discount to the 37.5% flat rate the pirate party is currently proposing, the tax on investment income would be 22.5% - again, competitive by international standards.

I agree with you that we shouldn’t push policies that would be difficult to explain, but this comes across as fair as I think people would generally be accepting of taxing income from investments at a lower rate given that people have already paid tax once on the money they are investing.

I’d be really interested to hear your thoughts.

Jason

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We have a funny idea about “investment” these days. In the old days investment meant buying capital equipment which increased the productive capacity of a business. This activity is obviously valuable and worth encouraging.

But somewhere, somehow, we’ve corrupted the term. We’ve mixed up real investment with idle speculation. We actually describe stock market gamblers and people who buy existing housing stock as “investors” these days. But what are they actually investing in? what productive capacity are they actually creating? Housing speculation doesn’t increase housing stock—it just locks the young and the poor out of the market. Share market speculation doesn’t build productive assets, it just swaps money between traders and blows up stock bubbles. Yet we treat all these activities as if they were immensely valuable “investment” in need of favours from the tax system.

Well, I don’t think they are. And I’m suspicious of whatever policy prescriptions emerge from muddling up investment with speculation. I think my colleagues in the economics profession have buggered this up, to be honest. And the price of our failure has been things like trickle-down economics, which was meant to unleash waves of jobs and investment but ultimately did nothing but create wealth inequity and bubble economies.

To answer your question very specifically, I might be tempted to support incentives for certain activities, but only if we can draw a straight clear line between that activity and higher productive capacity for the country. Most of the things the BCA and others are talking about fail that test.

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Budget 2016: Cutting business taxes does not lead to growth, says study

The full report is here: