Australia’s high company tax rate is wage theft on a grand scale
5 March 2018
This opinion article by Grant King was published in the Australian Financial Review on 5 March 2018.
The purpose of the government's 10-year Enterprise Tax Plan plan is clear. To make sure Australian corporate tax rates are globally competitive so businesses in Australia and from overseas are incentivised to increase investment in Australia. Past experience shows that increased investment increases jobs and incomes. This is fact – not conjecture as some contend – with the ABS reporting that historically 55 per cent of growth in GDP has gone to wages and salaries.
The recent reductions in US corporate tax rates has, along with other adjustments, supercharged the US economy and increased the risks for Australia. Almost 56 per cent of Australia's $5.8 trillion capital stock has been funded by foreign capital. The US is the largest source of foreign domestic investment in Australia, accounting for around a quarter. If our tax rates are uncompetitive that flow of foreign capital will reduce.
Furthermore, there is an increased likelihood that domestic capital previously funding investment in Australia will be increasingly invested overseas. For example, 23 per cent of superannuation fund assets are already allocated in international equites and investments. This could easily be expanded.
Many of Australia's largest businesses and biggest employers have spoken out in support of this plan, as have many economists, agencies and other commentators.
While the risk of uncompetitive tax rates and the benefits of the Enterprise Tax Plan seem clear, some are clearly opposed to it. But to oppose policies that create economic growth, jobs and ultimately income growth is wages theft on a grand scale.
Treasury estimates that the plan will add 1 per cent, or $18 billion, to GDP each year. As has been the case in the past, 55 per cent or near $10 billion each year could flow to increased wages and salaries – a huge and recurring benefit to all Australians.
Robust debate on the merits of any major policy should be welcomed. Opposition based on misunderstanding and misrepresentation – and there has been much of this – should be challenged.
Fair share of tax
The reduction in tax revenue as a result of the full implementation of this plan over a 10-year period is estimated to be $65 billion. This has led to claims that business would not be paying its fair share of tax, there will be much less money to fund public services, it will add to the deficit, and it is a gift to big business.
There are facts that can be brought to bear on these criticisms.
Australia's reliance on corporate tax is estimated to be $84 billion this year, and is the third highest in OECD countries as a share of total tax revenue. Australia has one of the strongest tax compliance regimes in the world and the level of tax compliance is high. Some seem to delight in the discovery that in any given period not all companies pay tax: but all they have discovered is that not all companies generate a taxable profit in a given period.
Some might mistakenly compare the $65 billion reduction over the 10-year period of implementation with annual corporate tax payments. This is, of course, erroneous. The $65 billion should be compared with the estimate for corporate tax payments over the same 10-year period.
The Parliamentary Budget Office estimates corporate tax payments will be $1.1 trillion across the same period. The planned reduction in corporate tax should be compared with the net benefit of an $18 billion annual increase in GDP or $180 billion over the 10 years (in today's dollars).
The payoff from the investment in the Enterprise Tax Plan is overwhelmingly positive. Importantly the $65 billion reduction in corporate tax doesn't disappear from the economy.
Some $30 billion of the $65 billion is now committed with the first phase of cuts for businesses with revenue of less than $50 million. Treasury's MYEFO indicated that the budget is on track with a forecast surplus within three years, driven substantially by higher company tax collections. The 10-year implementation period sees much of the cost fall within a period of forecast surplus. So the income growth from the implementation of the plan and the taxes on it are an important contributor to the return to surplus.
We have clearly struggled to find a path back to sustainable surplus by controlling expenditure so we must back policies that will help our economy grow out of deficits and reduce our country's debt.
Perhaps the most disappointing aspect of some arguments against the plan is that big business will benefit. The Business Council doesn't support the plan because big business will benefit, we support the plan because all will benefit.
Businesses big and small depend on each other. It is estimated about half of small and medium-sized business revenue comes from other businesses. Big business needs the flexibility, innovation, competitiveness and responsiveness that smaller businesses bring.
If big businesses prosper, so will all other businesses and – given that business employs about 80 per cent of all employees – so will all Australians.
Those that oppose the company tax cut need to explain whether they intend to increase taxes for businesses already benefiting under the plan. They also need to explain why their dislike for big businesses justifies depriving the many thousands of small to medium enterprises employing millions of Australians the benefit they will get from implementing the plan. They forget that for many in small business, their profit is their wages and that a reduction in tax is an increase in their wages.
I expect that the debate will continue for a while yet. My hope is that the debate will increasingly be informed by the evidence, that the shallowness of opposition to it will become clear and that at the end of the day we can support the only plan on the table to produce a growing economy and more prosperous community.
Grant King is president, Business Council of Australia.