Media & Speeches

The need for company tax cuts is now becoming urgent

This opinion article by Jennifer Westacott was published in the Australian Financial Review on 18 June 2018.

The contortions of those opposing any cut in the company tax rate have never been more exposed than their response to the March quarter national accounts.

The rebound in exports, particularly of resource commodities, helped deliver 1% GDP growth over the March quarter and trend through-the-year growth of 2.8%. Even better, GDP growth per capita (a better indicator of changes in living standards) strengthened.

Just as the improved budget outlook largely reflects better economic performance — company taxes are expected to grow to more than $100 billion by 2021-22 — the national accounts offer clear proof that stronger corporate performance flows directly to higher per capita incomes.

But this one quarter of good numbers (reflecting in large part strength of global markets) does not negate the case for a more competitive company tax rate — just as a slower economy and relatively weaker budget position did not make a case for inaction either.

Cutting the company tax rate is about doing everything possible within our control to ensure Australia’s economy is as competitive and resilient as it can be — come rain, hail or shine — and lock in stronger growth.

Cutting the company tax is a value-for-money insurance policy. It’s about putting in place the right settings to ensure we get the investment needed to drive future wages and jobs growth whatever economic surprises come our way. Capital deepening has been the single biggest driver of higher labour productivity and therefore real per capita income growth in Australia for several decades and will remain so in future.

So, while it’s good to see new non-mining business investment slowly emerge from years in the doldrums, this promising recovery remains tentative.

Notwithstanding the 3.1% increase in new business investment in the year to March 2018, business investment as a share of GDP, at 12.2%, is still stuck at a level last seen in the mid-1990s after deep recession.

And the latest capital expenditure data, when adjusted for historical spending patterns, suggest that business investment plans for 2018-19 have eased off relative to earlier expectations, rather than strengthened.

The reality is that the investment recovery that is needed to lock in stronger wages growth is not yet in the bag.

The Business Council has never claimed that the company tax rate is the only reason for lacklustre investment. Politicisation of investment projects, delayed project approvals, moratoriums on gas exploration and global economic risks are just some of the impediments confronting and deterring businesses.

But having the third-highest company tax rate in the advanced world isn’t helping one jot. Nor is giving global investors every indication that Australia’s Parliament would be happy to preside over the tax regime becoming even less competitive in the future.

Those arguing that this does not matter because businesses will continue investing here regardless and foreign customers will continue to demand and pay high prices for our exports, are living in a fool’s paradise. In effect, they are prepared to bet Australians’ future living standards for misguided political expediency. They are misguided because working Australians understand the alignment between their jobs and pay-packets and successful, competitive businesses better than most politicians do. 

Many of us know from lived experience that Australia can benefit greatly from improvements in the terms of trade. But the record also shows that what goes up, eventually comes down, and may stay there for many years.

Those in business also know that investment projects don’t automatically get approval because they happen to be in Australia. Projects must compete on their merits and that contest is becoming much tougher.

It is patently clear that Australia’s 30% company tax rate imposes a large distortion on investment and the economy. It sets a higher rate of return hurdle for new investments in Australia than in many other countries. The gap has widened in recent years and is set to widen further with rate cuts scheduled in the UK, France, Belgium and the Netherlands. In a world of highly mobile capital, a net capital importer such as Australia cannot afford to lag.

The costs being borne by the economy are substantial — we are forgoing 1.0% of GDP each year, the equivalent of $18 billion a year in today’s terms — by not moving.

Yes, of course the modelling depends on assumptions. Indeed, any claim about the impacts of any policy intervention relies on assumptions. Unfortunately for many policy proposals, these assumptions are implied rather than made transparent.

But Treasury’s modelling of the company tax cut transparently tests the robustness of its results against a range of plausible assumptions. It confirms that a more globally competitive company tax rate is one of the most direct and effective economy-wide policy levers we have at hand for boosting investment, economic growth, jobs and wages. Treasury’s results are in line with comprehensive econometric analysis by the OECD and others of the real-world impacts of company taxes in advanced economies.

Given the overwhelming weight of evidence, the continued vehemence of those opposing the Enterprise Tax Plan — including many who previously accepted the economic case for it — is mystifying, particularly when their ‘trump card’ that it was unaffordable has bitten the dust.

We were told it was irresponsible when the budget was in deficit but now apparently it is redundant because the economy and budget are improving. They cannot have it both ways.

We must see beyond such posturing and do what is right for the country. The window for signalling to global investors that Australia wants investment is closing. There is a proposal on the table to do something about it. It is time for the Parliament to get behind it.