12 Mar Half a tax cut just doesn’t add up
James Paterson — Australian Financial Review — 12 March, 2018
Australia risks leaving in place an inefficient and distorting two-tiered company tax system, if the government’s company tax plan – to reduce company tax from 30 per cent to 25 per cent by 2025 – isn’t passed.
At present the opposition and crossbench only favours lowering the company tax rate from 30 to 25 per cent for businesses with a turnover of less than $50 million by 2026-27.
Support for some tax cuts is better than nothing. Any government would accept passage of part of their agenda over none. But the result of this deal could be the inadvertent creation of a two-tiered company tax system that will create a series of perverse incentives and vastly limit the benefits of company tax cuts.
Politically, it may be easier to support tax cuts for small businesses than what One Nation’s Pauline Hanson has derided as “the big end of town” – a phrase that evokes the image of greedy top-hat-wearing capitalists like you’d find in a Dickensian novel. However, this decision will result in a discriminatory tax system that effectively punishes businesses for their success.
Australia should be encouraging businesses to grow. It is a good thing when a small business becomes a large one.
A two-tiered company tax regime will do the exact opposite. It will hit companies with a 5 per cent tax increase as soon as they pass a turnover of $50 million – regardless of how profitable they may be. It will discourage innovation and create a perverse incentive for companies on the margin to limit their growth or artificially structure their affairs to avoid crossing this threshold and paying more tax. It will inevitably impact business investment, economic growth and job creation.
A two-tiered tax system will seriously dampen the benefits that would otherwise come from cutting Australia’s company tax rate. The biggest bang for buck in economic growth will come from lowering taxes on our largest businesses.
As economist Saul Eslake has argued, the greatest growth in private sector employment in recent years has come from big companies. ABS surveys on innovation show large businesses are most likely to adopt new and innovative practises. It is big businesses that pays the overwhelming share of company tax today – and therefore are the most likely to respond to a reduction in tax rates. According to the latest figures from the Australian Taxation Office, Australia’s 2475 biggest companies – the top 0.2 per cent – pay almost 64 per cent of all company tax in Australia. The international capital flows that a lower corporate tax rate is designed to attract overwhelmingly go to big business.
Economists disagree about the exact share of the company tax burden that falls on shareholders through lower returns, employees through lower wages and customers through higher prices. But all agree it is a shared burden.
Shareholders, employees and customers of large businesses are no less deserving of being relieved of that burden than small businesses. We all interact with large businesses every day.
Ironically, Opposition Leader Bill Shorten has made perhaps the most cogent argument against a two-tiered system. As assistant treasurer in 2011 he said:
“Lowering the corporate rate for smaller businesses only [as the Greens propose] creates an artificial incentive for Australian businesses to downsize. In worse case scenarios some businesses might actually lay people off to get smaller – and the size-based different tax treatment would create a glass ceiling on business workforce growth. Instead we want a level playing field regardless of the size of the company.”
Leaving in place a differential rate of company tax also runs the risk the company tax system will become even more progressive over time, with more thresholds and higher rates imposed on larger businesses, like the personal income tax system. This would compound the inefficiencies even further.
Sadly it is not hard to foresee a future government succumbing to economic populism. But in doing so, the public already hostile to big business, will become accustomed to a multi-tiered regime.
There is only one way to fix this dilemma. No one in their right mind will vote to increase taxes on small businesses to bring them up to the same level as large ones – and nor should they. The Senate crossbench must allow the government to finish what it started and pass the rest of the company tax cuts.
This article originally appeared in the Australian Financial Review.