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Treasurer Scott Morrison has strengthened his resolve to reduce the corporate tax rate following the upward revision of global forecasts by the International Monetary Fund (IMF), but one economist has argued against this.
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Post-Trump corporate tax rate debate ‘misrepresented’
24 January 2018
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The IMF revised its global growth forecasts for 2018 and 2019 upward by 0.2 per cent to 3.9 per cent, attributing it to the recent tax reforms in the US.
Mr Morrison said the IMF report supported the government’s plan to reduce the corporate tax rate, leading to “more jobs and higher wages for Australians”.
“Higher global growth provides more opportunities for Australian businesses and Australian workers, provided it is supported by the right policies,” said Mr Morrison.
“Our plan to cut taxes is designed to ensure that Australia realises these opportunities.”
However, independent economist Saul Eslake says Mr Morrison is misrepresenting the facts of the IMF report.
"I think [Mr Morrison] is in some way misrepresenting what the IMF has said about the impact of Trump's policies and glossing over some important differences between Trump's policies and what the government is seeking to achieve,” said Mr Eslake.
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“If you read what the IMF has actually written, they say most of the impact of the Trump policies that they see as boosting growth over the next couple of years comes from the temporary expensing of capital investments, that is for five years, businesses which undertake capital expenditure will be able to claim all of that as an immediate tax deduction rather than claiming depreciation.
“That is not what this government is proposing — it is proposing a deduction in the corporate tax rate which is also part of Trump's policies but the IMF is saying the thing is providing the boost is not the company tax rates, it is the immediate expensing of investment which is a little bit like the instant asset write-off for small business that Joe Hockey introduced and which has since been extended a couple of times.”
Conversely, Mr Eslake says the IMF report states that the upward revision will be followed by a period of weaker growth due to the need for a future administration to “fix the budget deficit” caused by the unfunded tax cuts.
The Tax Institute also recently cautioned the government in its pre-budget submission to resist a knee-jerk, post-Trump reaction to addressing the corporate tax rate in Australia.
The “race to the bottom”
Instead, the University of Tasmania vice-chancellor’s fellow believes an individual tax rate cut would do more good for the economy.
“Given our dividend imputation system, the benefit of cutting the statutory tax rate in Australia will go primarily to foreign shareholders and while that may raise the rate of return on investment in Australia, there's absolutely no guarantee or any compelling reason to believe that foreign companies will necessarily increase their investment in Australia,” said Mr Eslake.
“Businesses make investment decisions for a whole host of reasons of which the tax rate is only one so I don't think arguments put forward for Australia to join this race to the bottom in terms of corporate tax rates are all that persuasive.
“It's far more likely that a given dollar amount of a personal income tax cuts would be recycled into spending into the Australian economy than the same dollar amount of corporate tax cuts,” he added.
“For example, Canada lowered its tax rate from 42 per cent in 2000 to 26.7 per cent by 2015 but the business investment as a share of GDP has been virtually unchanged over that period — it was 20 per cent in 2000, and it was 21 per cent in 2017.
“Here's an example where a country similar to Australia, cuts their corporate tax rate and business investment as a share of GDP has barely changed so it is a respectable theoretical argument that cutting the corporate tax rate boosts investments but it's hard to find evidence that the theory is significant in practice.”.
Mid-tier support
Australian mid-tier firms have long supported reducing the corporate tax rate to keep profits onshore. BDO’s national head of tax, Marcus Leonard, has been particularly vocal.
“To be competitive on the world stage, Australia needs to attract capital from global capital markets. There is a direct link between the level and allocation of cross-border investments and the corporate tax rate,” Mr Leonard told Accountants Daily last month.
“Attracting foreign direct investment is the primary goal of many who advocate reductions in statutory company tax rates,” he said.
“The potential benefits to Australia of greater foreign direct investment include greater labour income through increased productivity and possibly employment and positive externalities or spill-overs associated with foreign direct investment which could improve labour and capital productivity,” he said.
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