In response to the election of Donald Trump, our business lobby, abetted by lazy journalists, have renewed the push for a reduction of the company tax rate so we can remain “competitive” with Donald’s 15% corporate tax rate.
Aside from the fact that it hasn’t happened yet, the US seem to have had no trouble attracting investors with the current business tax rate of 35%.
This is what Forbes has to say about Trump’s proposal.
Businesses are supposed to be in for big tax cuts. Corporations currently pay 35%. President-elect Trump would cut it to 15%. But he would eliminate most business deductions. And there would be simplicity. Instead of depreciation over many years, he would allow up-front deductions. But forget deducting interest on debt, he has suggested. LLCs, partnerships and S corporations would have changes too. Candidate Trump suggested that the owners of these entities should pay the same 15% rate as corporations. Astoundingly, that could mean someone taxed at 39.6% or even 43.4% on flow-through business income now, could see their tax rate slashed to 15%! Of all the proposed tax changes, this one — if it happens — may be the most momentous.
Already, some people are wondering if they can cash in. For example, can wage earners who are paying high income taxes now become independent contractors by forming an entity and conducting their own business? If you pay 39.6% now and could pay 15% by doing that, the incentives are huge. Of course, there are already huge fights and audits over worker status issues. And this change (if it happens) would most likely increase them. It is hard to figure how to handle this one before year-end. Some people will
Trump has proposed personal and business tax reform that would reduce tax revenues by an estimated $4.4 trillion over ten years, or roughly 1.9% of GDP over that period.
And from ZeroHedge:
Ultimately, the outlook for a tax cut depends on how willing marginal Republican lawmakers are to increase the deficit, and/or how willing they are to find offsetting savings elsewhere. Overall, there is a good chance that some type of tax legislation passes next year, but the obstacles to comprehensive tax reform go beyond partisan disputes, so one should expect tax legislation that is adopted in 2017 to be narrower in scope than the campaign proposal.
Another aspect which our business lobby and journalists ignore is that Australia’s franked dividends system means Australian shareholders already enjoy favourable tax conditions on income earned from their investment in companies. The less companies pay in tax, the more individuals will have to pay in income tax on their investment dividends. However, foreign investors do not benefit from franked dividends and would benefit from a lower company tax rate in Australia.
A report by academics at the University of Technology Sydney says more than 40 per cent of Malcolm Turnbull’s $48 billion company tax cut will go to the offshore investors of multinational corporations and foreign tax authorities.
It said that the top 20 companies with the highest tax benefit include BHP Billiton, Rio Tinto, the big four banks, Telstra, Wesfarmers, Woolworths, British American Tobacco and Hancock Prospecting.
These top 20 companies account for $4.1 billion of the tax benefit, which is close to 75 per cent of the total $5.53 billion annual cost, it said.
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).
Officials predict the number of jobs would be boosted by 0.4 per cent above natural growth, at best.
And real after-tax wages would be lifted by a maximum of 1.4 per cent, according to a private estimate provided to Treasury.
“The evidence suggests the magnitude of that effect would be fairly small and only evident over a very long period of time,” Mr Eslake said.
Given our system of dividend imputation, it is questionable at best to say that having a headline corporate tax rate higher than our neighbours makes us uncompetitive. Economic and political stability are big factors for businesses making investment decisions, as is available infrastructure, an educated and skilled workforce, wage rates, other taxes, and the nature of the industry in question.
So before we start rushing to do the bidding of the Business Council of Australia, let’s see what actually transpires in the US and let’s have some actual in depth analysis about the impact of tax cuts on Australia.
Comparing base rates without all the additional information of other taxation laws regarding deductions, depreciation, the interplay with income tax etc, is simplistic, lazy, and deliberately designed to misinform.
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