Last week saw the release of the much anticipated options paper of the Government's Business Tax Working Group. The paper discusses the benefits of reducing the company tax rate and suggests 23 options to pay for it. These would broaden the business tax base, by reducing or removing various tax concessions; the three categories identified are: interest deductibility (including thin capitalisation), depreciating assets and capital expenditure (including capped effective lives), and the R&D tax incentive for turnovers in excess of $20 million.
So the question in some ways becomes: to company tax or not to company tax?
The Government's ground rules are clear: some business tax breaks will have to go if we are to reduce the company tax rate. This means some hard questions will need to be debated and answered. One of the most important is: how badly do we actually want a company tax cut?
A cut in Australia's company tax rate will deliver economy-wide benefits that are necessarily in the national interest. As a result, The Tax Institute supports reducing the company tax rate in the medium term from its current 30% to the 25% recommended by the Henry tax review. In addition to increasing Australia's attractiveness as a destination for foreign investment, a 25% rate is comparable to rates in similar sized OECD countries. A mooted 28% rate would be a step in the right direction and Australians across the board will stand to share in these benefits.
A wealth of reliable evidence indicates that the incidence of company tax falls on employees. This means that reducing the burden of company tax is expected to result in companies passing on the benefits to their employees either in the form of increased wages or additional recruitment - increasing productivity and employment.
A company tax cut would also reduce taxes on investment, driving an increase in savings and capital as well as innovation and entrepreneurship - all outcomes that are indisputably in the interests of all Australians. Such a cut would also reduce the incentive for profit shifting out of Australia, allowing us to retain a greater share of the profits generated here in Australia.
Herein lies the rub - despite considerable future benefits, the company tax rate cut still has to be paid for today, and out of the business tax system. This will result in one of those inevitabilities of significant tax reform: short term winners and losers.
Negotiating this tricky situation requires significant community input and the maturity to consider the national interest ahead of the specific interest. The Tax Institute encourages vigorous, frank and honest debate about the merits of both the company tax rate cut as well as the various offsetting measures presented by the Working Group. Only through honest conversation can we achieve an outcome.
However, the context of this debate must be to view tax reform through a whole of tax system lens. We need to ask a number of tough questions - does our tax system inappropriately favour particular types of activities by way of tax concessions? As a result are business decisions being inappropriately influenced towards less productive outcomes?
In addition, where Australian tax concessions are currently more generous than comparable overseas jurisdictions, how appropriate are our policy settings in light of the economy-wide benefits to be gained from trading off the level of such concessions for a company tax cut? A broader tax base and a lower rate are positive outcomes.
We cannot allow those who may view the removal of a concession as a short-term loss, to lose sight of the overall benefit to the Australian economy of a company tax cut. After all, we may only get one shot at this in the foreseeable future.
Robert Jeremenko is Senior Tax Counsel of The Tax Institute.
The Tax Institute is Australia’s leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.