The tax review panel chaired by Dr Ken Henry has recently begun to prepare its final report for the Treasurer. If recent press reports are to be believed, a cut to the company income tax rate is on the cards.
What really matters is not the headline statutory tax rate per se, but whether a cut is accompanied by base-broadening measures that ensure the total amount of tax revenue from companies to government does not fall.
This is why the recent ALP national conference resolved that any cut the Government decides to make must be accompanied by appropriate steps to ensure a revenue-neutral outcome.
But before thinking about base broadening, we should first ask: is there evidence that our current headline rate of 30 per cent is rendering our economy uncompetitive and so should be reduced? The ACTU does not think there is.
Our present rate is not out of step with comparable countries. It is lower than rates in the US, Japan, France, Canada and Belgium.
It is slightly higher than those in Britain, Norway and Italy. And it is the same as in New Zealand, Spain and Germany.
The impression given by some who wish to see substantial cuts in company taxes is that cutting rates is vital to competitive success; that
if we want to continue to grow we need to engage in aggressive tax competition.
If this were true, then when we look at rates in other countries we should expect to see evidence of a “race to the lowest rate”.
But there is no such evidence. Rates in many countries have certainly fallen since the 1970s, but they continue to vary widely – from nearly 40 per cent in the US, to 28 per cent in Finland, 15 per cent in Iceland and 12.5 per cent in Ireland.
Before the global recession, low company taxes in Iceland and Ireland succeeded in attracting much short-term speculative investment. Both countries have since discovered to their cost that robust and balanced growth cannot be secured simply by offering a cheap ride to global investors.
But comparing tax rates can only tell us so much. The key question for policymakers and working Australians is: do lower company tax rates generate more investment?
There is no clear evidence that they do.
For example, according to the OECD, in the 2000-03 period Germany, France and Canada imposed higher tax rates on company income than did Australia. However, they also attracted significantly more investment from abroad than we did.
Furthermore, the review panel’s own consultation paper shows that when measures of foreign and domestic investment are combined, in almost every year since the early 1980s Australia ha s achieved higher levels of “gross national investment” than countries such as Britain, the US, Canada and New Zealand. This is despite the fact that, according to some measures, the total tax burden on companies in Australia has been above the OECD average for some time.
So, the relationship between company taxation and investment is complex. Of course investors like low taxes. But they also want to invest in countries with healthy, educated workers. They want governments that can offer political stability, an effective legal system, and high-quality social and economic infrastructure.
What if a cut to the company income tax rate were made that resulted in a reduction in the total amount of taxes paid to government?
Such a cut could do real damage. It could undermine our efforts to rebuild our vital infrastructure after years of neglect. It could make it more difficult to meet the rising social costs generated by our age ing population.
Furthermore, many businesses are benefiting from the current stimulus spending. They should continue to make a fair contribution to helping to pay for such spending, and for the many government services that help them to make their profits.
The ACTU therefore emphatically opposes the recent call by the Business Council of Australia for the company income tax rate in Australia to be halved – from 30 to 15 per cent – and with no base-broadening measures.
The ACTU hopes the tax review panel will avoid recommending a headline cut for the sake of making headlines.
A strong business sector is important, but a convincing case for reducing the taxes it pays has not been made.
This article first appeared in The Age on 18 September, 2009