Reducing Australia's corporate tax rate — the unconvincing case for 25%

In the article Prof Cooper points to the case for reducing the corporate rate, both in the past and in the current debate, as being very largely based on the effects that a reduction would have on levels of foreign direct investment in Australia. 2 But the focus is on the question of how compelling the arguments are that lie behind that recommendation? 


The case being made is that an immediate, certain and widely dispersed revenue loss 3 should be wagered in the hope of triggering a contingent and deferred response from a narrow target audience. 4 


Prof Cooper asks, 'Do the reasons advanced so far suggest that is a good bet?'

He points out that it is, of course, quite conceivable that the corporate rate should be reduced to 25%, but for reasons quite different to those advanced so far — that there are beneficial, but entirely domestic, consequences that would follow or that we are somehow being unfashionable in not following current international trends. 


In short, the 25% rate might be good policy or bad; the argument of this article is that the case presented so far is less than compelling.

Part of the problem for those who wish to see a rate cut lies in the breadth of the terrain that the corporate tax covers: the one policy instrument applies largely indiscriminately to small companies and large companies, to privately held and widely held companies, to those undertaking active business operations and those holding mostly passive investments, to those needing to go to capital markets for further funding and those that are stable or even in decline, those that raise their capital locally and those that rely significantly on foreign markets, and to those principally with local shareholders as well as those with a large proportion of foreign shareholders. Unless some nuances are introduced to the base or the rate or both, it is a very blunt instrument.

There is no doubt that Australia’s corporate tax system might be adjusted to incorporate more nuance and differentiation, but the debate about the rate has not attempted much differentiation: the case seems to be based on a 'one-size-fits-all' view of the corporate tax rate — arguments are presented because they are seen as persuasive for one sector, even though they will have impacts on all other sectors and are not especially cogent in those arenas. 


In fact, that is the lesson of the recent past: the case for a rate reduction is advanced using arguments relevant for large, publicly owned, foreign-funded companies that need further capital; the benefit of the recent rate cuts have been delivered to small, privately owned, locally funded, possibly stagnant companies. The incongruity between policy proposal and practical outworking is striking. And finally, it is perhaps worth pausing to say the main focus is on the merits of the debate as it is presented in tax policy circles. 


The article occasionally alludes to the political debate and the popular media, but criticising politicians or the media for being less than accurate is hardly worth the effort.

The first edition of Australian Tax Forum for 2018 features a special focus on corporate tax, and includes selected papers from a conference held in July 2017 at the Tax and Transfer Policy Institute at the Crawford School of Public Policy of the Australian National University.