As parliament resumes, the Coalition will be aggressively pushing their company tax cuts. Their branding has always been “jobs and growth” but there has been a subtle change lately to stressing the need to attract “foreign investment”.
The Australia Institute has just released research examining the reality about foreign investment by looking at the facts – an increasingly rare approach now that governments don’t bother with modelling.
Because of Australia’s unique system of dividend imputation, any reduction in company tax would reduce the amount withheld on behalf of dividend recipients and so increase the amount shareholders will have to ‘top up’ at tax time. Australian investors will receive no benefit.
This does not apply to foreign shareholders who will unambiguously benefit from a tax cut which is probably why Morrison is now trying to sell the idea that this would attract foreign investment. But would reducing taxes make any difference?
By value 71 per cent of foreign investment applications come from countries with company tax rates lower than Australia’s rate and by number a large 97 per cent come from countries with company tax rates lower than Australia’s rate. All of this raises the question – if Australia is already successful at attracting foreign investment why would we give tax cuts to foreigners?
Throughout the whole debate it is assumed that company tax rates are the critical variable affecting investment. However, any returns to the ultimate investors will depend on the individual tax system as well as the company tax and the interaction between the two. When we look at company tax alone Australia has the equal fifth highest among OECD countries yet when we examine the implied total tax rate Australia falls to fourteenth and is only marginally above countries such as the UK.
There has been no correlation in the past between decreases in company tax rate and the rate of foreign investment.
Michael Keating AC was formerly Secretary, Department of Finance and Secretary, Department of Prime Minister and Cabinet. He agrees the company tax cut will make no difference:
Frankly it is hard to think of reasons why this extension of the company tax cut would represent value for money, as it is unlikely to make much difference to investment nor growth. Indeed, company tax has been cut by a lot over the last few decades in a lot of countries, but in no country was there a significant impact on investment, output or employment. Second, the Government’s own modelling shows that this company tax cut would only increase GDP by 1% after as many as 20 years – which is an infinitesimal impact in the foreseeable future.
You cannot tax a profitable business into being unprofitable. Australia is an attractive place to invest because we provide a well-educated, skilled, healthy workforce, a stable social and political environment (comparatively), a strong legal and judicial system and established infrastructure.
We have invested a lot of money to provide that environment and businesses have seen the value in taking advantage of the quality labour, the transport infrastructure, and the stability our society provides.
It’s a pity our Treasurer does not recognise our value and price it accordingly.
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