Company tax cuts is the new banana republic test

3 May 2016 Australian Financial Review.

Australia will be the winner if the mooted company tax cut is quickly passed by Parliament.

There are challenging arguments which must be won for the benefits to flow.

If essential reforms can be defeated by populist arguments, Australia would already be a Banana Republic as Paul Keating feared in the 1980s.

The argument the Coalition and Labor need to win against the Greens, who oppose change, is simply there will be fewer Australian jobs without a company tax cut. In other words, workers are the biggest beneficiary of a company tax cut.

The proof points are: (1) we are losing jobs offshore, (2) other nations have done it, (3) our reliance on company tax is dangerously high and (4) profit shifting is not a barrier to action.

Firstly, our uncompetitive company tax rate of 30 per cent costs Australia jobs. It compares poorly to the Asian average of 22 per cent and OECD average of 24 per cent.

Capital and labour are mobile. The investment, brains and the jobs go to the best business environment.

The jobs of the future are nimble and services-based.

Seventy per cent of Australian jobs are currently in the services economy and this will only grow. The services jobs in technology, finance, legal, medical, education, professional services and tourism need a competitive platform.

Barriers to entry are relatively low in the services economy. Services aren’t encumbered with the bricks and mortar factories like Ford built in Geelong and Broadmeadows and General Motors established at Elizabeth. 

Intangible industries of the future such as “FinTech” will disappear unless we get our act into gear because our competitors such as New Zealand, Japan and Singapore are progressing while we stagnate.

The high company tax rate is one of the primary reasons Australia continues to fall in the global competitiveness indices. The latest Global Competitiveness Report from the World Economic Forum cites tax – the high rates of both income and corporate taxes - as the biggest drag on Australia’s competitiveness.

 

Australia is ranked at 21, trailing similar nations such as New Zealand at 16 and Canada at 13. Both have lower company tax rates. 

 

Secondly, other nations have done it. Britain achieved an economic dividend by reducing company tax from 28 to 20 per cent in just five years. UK Treasury modeling shows the tax reductions are increasing investment by up to 4.5 per cent and GDP by 0.8 per cent. 

 

To test the UK model in Australia, KPMG modeled cutting our company tax rate to 22 per cent.

 

KPMG found Australia’s economy would increase by two per cent, investment would rise by 3.7 per cent and thousands of new jobs would be created.

 

No other single tax change moves the needle on growth like a company tax cut.

 

Investment skyrockets with a significantly lower company tax rate because projects in Australia become more attractive to investors. The bulk of new investment is foreign capital.

 

This is a good thing. We have relied on foreign capital since 1788. It will only become harder to attract as our neighbours such as New Zealand and Japan reduce their corporate tax rates.

 

Thirdly, our reliance is dangerously high.

We have the second highest reliance on corporate taxes in the OECD at almost 20 per cent of Commonwealth revenues.

 

The high reliance on company taxes in just a few sectors mean the budget is subject to risk and volatility. We will again see volatility in this budget.

 

Finally, the valid concerns about base erosion and profit shifting is no justification for inaction.

Some multinational companies in Australia are not paying their fair share of tax.

However, transfer pricing to move profits offshore cannot be solved by Australia alone.

Only a global agreement, currently being brokered by the OECD and G20, can solve this problem.

Just as climate action is unilaterally futile, profit shifting cannot be solved by Australia.

Arguing for a high company tax rate today is akin to arguing for high tariff walls in the 1980s – it ignores the fact we live in a globalised economy.

John Howard often says the Coalition under his 1980s leadership supported the Hawke government bring down the tariff walls.

He could have been reckless by refusing to co-operate with sensible, long-term economic reform. As could opposition parties today.

Accordingly, continued bipartisan support for a lower company tax rate will demonstrate the Banana Republic threat isn’t coming back.  

Australian workers need the rate to be closer to 20 than 30. There is no time to waste.