The Coalition finally decided to reduce company tax rates from 30% of accounting profits to 25% in 2026-27. This will be implemented by lowering rates on small businesses first, gradually extending to all companies in Australia. Many are worried however, that a reduction in government revenue will make it harder to fix Australia's debt.
The simple response to this concern is that cutting company taxes will increase, rather than decrease, government revenue. As a policy that will create short and long term economic growth, company tax rates will make Australian companies more profitable and drive foreign investment. This is a far superior and guaranteed method of solving our debt problem.
The complexity then, lies in figuring out to what extent company taxes will create economic growth. If businesses do not expand to the degree estimated, if foreign investors do not invest more simply because of the tax cut and if the investment ends up fueling asset bubbles, then most of the macroeconomic benefits simply will not happen.
General equilibrium models used by the Treasury and by the Parliamentary Budget Office, estimate that the 'loss of revenue' will amount to something between $48bn and $51bn as the ABC noted:
The treasury predicts a long-term boost to national income of less than 1 per cent (0.8 per cent at best — one private firm says it could be as low as 0.5 per cent)... Instead of growing by 40 % after two decades, income would by almost 41 %.
Is this valid criticism? Does a 1% increase in national income twenty years down the track justify a $51bn budget cut?
Yes, here’s why:
- Firstly, the $51bn ‘loss in revenue’ is an estimate over a decade, meaning that the average yearly loss of revenue for the Treasury is only $5bn out of a federal annual budget of $411bn, where company tax revenue accounts for $70bn (that is, only 17% of treasury revenue).
- Secondly, I could be equally sensational and add up the alleged benefits (“1% higher growth”) for every year after 2036 and post an absolutely gigantic number, since the Australian GDP for every year beyond is estimated to be permanently $16bn higher than the status quo. In other words, the increase in growth coming from the tax cut could currently pay the yearly interest on the national debt, or all the assistance to unemployed, sick and veterans combined.
- Thirdly, what really matters here is perspective; of course a very minor cut to company tax rates (30% -> 27.5% -> 25%) is going to have a very minor impact on the economy. Big surprise.
The strongest case for a company tax cut is that Australia's current rates are far higher than most other countries, making us hopelessly out of pace with the rest of the world. Since 2007, Canada cut its corporate tax rate by almost a third, as did the U.K. New Zealand cut its rate from 33% to 28% and even utopian Scandinavia has aggressively cut taxes on corporate profits; Sweden and Denmark from 28% to 22%; Norway from 28% to 25% and Finland from 26% to 20%.
[caption id="attachment_3827" align="alignleft" width="300"] How far Australian tax rates have risen as a share of GDP, compared to the rest of the world according to the OECD[/caption]
Having understood that global economic conditions are more volatile than ever, these countries are ensuring growth by helping their businesses to flourish. To believe that Australia is immune from such changes, or that its mining booms, investment and housing booms will save it is hopelessly naïve. Reducing company tax rates will allow Australia to ensure short and long term economic prosperity. Although the coalition's recent proposals deserve praise, we should really be asking how to reduce corporate taxes further and sooner. High company taxes are not an addition to government revenue, but a cost to Australia’s long term economic growth.
Joakim Book Jönsson is completing a joint honours degree in Economics and Economic & Social History at the University of Glasgow.