Company Tax

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<p>They’re at it again, pushing lower company tax as a way to resuscitate the economy.</p>
<p>The arguments were well ventilated at the time the government pushed for company tax cuts, failed to get support in the Senate, and then abandoned them in favour of personal income tax cuts in the leadup to the last election, declaring “we’re not coming back to the company tax cuts”.</p>
<p>The new argument is that they’ll help get us out of recession, but in the same sense that Leo Tolstoy observed that while all happy families resemble each other, each unhappy family is unhappy <a href="https://www.britannica.com/biography/Leo-Tolstoy/Anna-Karenina" target="_blank">in its own way</a>, each recession is different.</p>
<p>This recession is the result of the forced hibernation of large parts of the economy in order to reduce the spread of COVID-19.</p>
<h2>This recession is about households</h2>
<p><a href="https://images.theconversation.com/files/350383/original/file-20200730-17-14n6v9d.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/350383/original/file-20200730-17-14n6v9d.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" alt=""></a></p>
<p><span class="caption">The first priority will be household spending.</span></p>
<p>When the time is right, it will be households that hold the key to reversing the effects of hibernation.</p>
<p>Australian households account for 60 cents in every dollar spent in the Australian economy, and they accounted for a disproportionate share of the fall in GDP in the first half of 2020.</p>
<p>With shops and cafes shut, the need for investment in new facilities is low.</p>
<p>The first step to recovery has to be reopening the businesses that exist and are closed or are operating well below capacity.</p>
<p>This means getting households spending, supported by stimulus.</p>
<h2>Company tax cuts benefit foreigners</h2>
<p>Our modelling in 2018 showed that while a company tax cut would stimulate investment and economic activity, in both the short run and the long run the benefits would accrue to <a href="https://www.copsmodels.com/elecpapr/g-287.htm" target="_blank">foreign investors</a> rather than to Australians.</p>
<p>In theory, all investors should respond positively to a lower company tax rate, but under Australia’s system of <a href="https://theconversation.com/words-that-matter-whats-a-franking-credit-whats-dividend-imputation-and-whats-retiree-tax-111423" target="_blank">dividend imputation</a> local investors are shielded from company tax, meaning the cuts matter most for those overseas.</p>
<p>Those overseas investors would be likely to invest more in Australia after a company tax cut, boosting Australia’s capital stock (buildings and equipment) making workers more valuable, pushing up wages. </p>
<p>While sold as a plus, higher wages would make it harder for locally-owned businesses. Our modelling found the biggest losers would be in the retail, <a href="https://theconversation.com/big-business-doesnt-want-to-talk-about-it-but-smes-lose-from-a-company-tax-cut-57965" target="_blank">health care and education industries</a>.</p>
<p>With foreign investors paying less tax, the local population would bear the consequences of spending cuts or higher taxes, broadly negating the benefit of higher wage growth.</p>
<h2>COVID makes the case weaker</h2>
<p>As well, much of the company tax cut would be ‘wasted’ providing a windfall gain to foreign investors already in Australia.</p>
<p>The case for a company tax cut is now weaker, not stronger, than it was in 2018.</p>
<p>Budget deficits will reach new highs in 2019-20 and 2020-21. It is the right policy for the circumstances we are in, but it will leave future governments with difficult decisions about budget repair.</p>
<p>When the economy is strong enough, taxpayers could face deficit repair levies, bracket creep, new taxes, and the broader application of existing ones.</p>
<p>It is for this reason that the <a href="https://www.imf.org/%7E/media/Files/Publications/covid19-special-notes/special-series-on-covid-19-tax-law-design-considerations-when-implementing-responses.ashx" target="_blank">International Monetary Fund</a> warned against knee-jerk tax changes during the crisis and said:</p>
<p><em>a premium should be placed on measures that move the tax system in desirable directions – specifically: refrain from tax holidays; keep environmental taxes; do not cut corporate income tax rates</em></p>
<p>If the company tax rate was to be cut now, it would be difficult later to restore it to where it was when it was needed.</p>
<p>The smaller tax contribution by foreign investors would mean more of the adjustment would fall on us.</p>
<h2>And investors may well find us increasingly attractive</h2>
<p>Another fresh reason to be cautious about a cut in company tax is that Australia’s relative attractiveness as an investment destination might well improve.</p>
<p>We have suffered, but most of the world has suffered the same or worse.</p>
<p>Deciding where to invest their next dollars, investors might well form the view that our response to the pandemic has been better than those of other destinations such as the United States, Britain and Brazil.</p>
<p>One of the benefits of being a peaceful, well-managed resource-rich Western democracy is that when things are bad elsewhere foreign investors look here.</p>
<p>We might continue to find (as we have in the past) that we get all the foreign investment we can handle with our company tax rate as it is.<img src="https://counter.theconversation.com/content/143622/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;"></p>
<p><span><a href="https://theconversation.com/profiles/janine-dixon-11006" target="_blank">Janine Dixon</a>, Economist at Centre of Policy Studies, <em><a href="https://theconversation.com/institutions/victoria-university-1175" target="_blank">Victoria University</a></em> and <a href="https://theconversation.com/profiles/jason-nassios-318488" target="_blank">Jason Nassios</a>, Senior Research Fellow, Centre of Policy Studies, <em><a href="https://theconversation.com/institutions/victoria-university-1175" target="_blank">Victoria University</a></em></span></p>
<p>This article is republished from <a href="https://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/post-covid-therell-be-less-of-a-reason-to-cut-company-tax-than-before-143622" target="_blank">original article</a>.</p>
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j.ballantyne1990-6AQqhLzZaK

Post-COVID, there’ll be less of a reason to cut company tax than before

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<p>GUEST OBSERVATION</p>
<p>The latest figures put Australia near the top when it comes to company tax collections, even though our total tax take isn’t particularly high.</p>
<p>In international tax circles, as in other areas, we often talk about American exceptionalism.</p>
<p>But these days, it is becoming increasingly clear that Australia is exceptional in taxation, among members of the Organisation for Economic Co-operation and Development and indeed, compared to countries around the globe.</p>
<p>The OECD has just produced its <a href="https://www.oecd.org/tax/beps/corporate-tax-statistics-database.htm" target="_blank">first-ever detailed comparison</a> of company tax collections and rates and effective rates around the world. The “statutory” or headline rate comparisons cover 94 countries. The harder to calculate “effective” tax comparisons cover 88 countries.</p>
<p>The bad news – for companies – is that Australia is close to the top among the 94 countries, and in one of the measures, the effective marginal company tax rate (more on this later), third from the top.</p>
<p>Click <a href="https://images.theconversation.com/files/253830/original/file-20190115-152971-1oevmqr.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip" target="_blank">here</a> to enlarge.</p>
<p><a href="https://images.theconversation.com/files/253830/original/file-20190115-152971-1oevmqr.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/253830/original/file-20190115-152971-1oevmqr.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a></p>
<p>Interestingly, in another recent report, the OECD shows that Australia clearly falls into the “low tax” group among OECD countries, with a tax-to-GDP ratio <a href="http://www.oecd.org/tax/tax-policy/revenue-statistics-2522770x.htm">below 25%</a>. But within that context we rely heavily on company tax.</p>
<p><strong>Company tax revenues are high</strong></p>
<p>Australia’s A$80 billion in company tax collections in 2016 was about 4.6% of GDP, ranking Australia twelfth out of the 88 countries for which the OECD had information.</p>
<p>Company tax accounted for 16% of Australia’s total tax revenue, the 27th highest out of the 88 countries.</p>
<p>The statistics have oddities. Luxembourg and Switzerland also have a high share of company tax revenues because they attract so much global capital. In contrast, the overall high-taxing countries of France, Denmark and Finland collect much less revenue from company tax.</p>
<p>Click <a href="https://images.theconversation.com/files/253831/original/file-20190115-152968-kcvom4.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip" target="_blank">here</a> to enlarge.</p>
<p><a href="https://images.theconversation.com/files/253831/original/file-20190115-152968-kcvom4.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/253831/original/file-20190115-152968-kcvom4.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a> </p>
<p><strong>Headline rates are heading down</strong></p>
<p>Corporate tax rates have been trending down for at least two decades. The Trump tax changes in 2017 that lowered the US federal rate to 21% was the latest dramatic change, but the United Kingdom now has a rate of 19% and many European countries sit at or below 25%. The change since 2000 has been dramatic and the global average is now 20%.</p>
<p>In our Asian region, the average headline corporate tax rate is 15%. As a result of <a href="https://www.oecd.org/investment/investment-policy/Towards-smarter-use-of-tax-incentives-in-Southeast-Asia.pdf" target="_blank">tax incentives available around Asia</a>, companies involved in manufacturing and supply chains often face a lower, or zero, rate.</p>
<p>This trend was identified by the Henry Tax Review in 2009, which recommended transitioning to a 25% rate, which today could be financed with a 1% increase in Australia’s GST rate, according to <a href="https://www.policyforum.net/australia-can-afford-cut-company-tax/" target="_blank">recent modelling by Chris Murphy</a>.</p>
<p>Click <a href="https://images.theconversation.com/files/253833/original/file-20190115-152983-16aslqh.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;h=524&amp;fit=crop&amp;dpr=1">here</a> to enlarge.</p>
<p><img src="https://images.theconversation.com/files/253833/original/file-20190115-152983-16aslqh.JPG?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""> </p>
<p><strong>What matters are effective tax rates</strong></p>
<p>The OECD also compares effective marginal tax rates (EMTRs), and effective average tax rates (EATRs), for corporate investment. These combine the headline rate with the rules for corporate investment, depreciation allowances for plant and equipment, and intellectual property investment.</p>
<p>In theory, investors choose to invest based on the expected after-tax rate of return, taking into account tax breaks and special rules.</p>
<p>The EMTR determines the tax cost of expanding an existing investment: putting one more dollar into that investment. In the EMTR ranking, Australia is third highest.</p>
<p>Countries that provide a tax break known as <a href="https://theconversation.com/how-the-government-can-pay-for-its-proposed-company-tax-cuts-92739" target="_blank">allowance for corporate equity</a>, including Belgium and Italy, actually have negative tax rates on increased investment.</p>
<p>The EATR reflects the tax rate that would be paid on an entire new investment. In the EATR ranking, Australia is, again, near the top in ninth place, at 30% – the same as our statutory rate.</p>
<p>Click <a href="https://images.theconversation.com/files/253834/original/file-20190115-152980-11hzrfk.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip" target="_blank">here</a> to enlarge.</p>
<p><a href="https://images.theconversation.com/files/253834/original/file-20190115-152980-11hzrfk.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/253834/original/file-20190115-152980-11hzrfk.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a></p>
<p>Unlike many other countries, Australia has few tax incentives. We do not have a low tax regime for intellectual property or accelerated depreciation for new equipment – except for small businesses, and mining exploration. Only in research and development did Australia provide higher tax subsidies than some other countries and the R&amp;D concession is <a href="https://www.budget.gov.au/2018-19/content/factsheets/6-tax-integrity" target="_blank">being tightened</a>.</p>
<p>Overall, Australia’s high rate and broad corporate tax base makes new investment, or the expansion of existing investment, expensive relative to other countries.</p>
<p><strong>Why are we such an outlier?</strong></p>
<p>Australia is a resource extraction and exporting economy.</p>
<p>We haven’t had to compete quite as hard for foreign investment as other countries.</p>
<p>Our relatively high rate of company tax serves two purposes: to tax company profits and to get a fair return on resources in the ground which state governments, through royalties, don’t properly charge for.</p>
<p>And we are geographically isolated, meaning that, even in the global digital economy, it is hard for companies to service us from offshore. Many have to be here and subject to tax.</p>
<p>Also, and importantly, our reliance on corporate tax is not as dramatic as it seems, because of our almost unique dividend imputation system. About one third to one half of corporate tax revenues are handed back to shareholders in credits against company tax already collected. (New Zealand, which has an imputation system, also has high corporate tax revenues).</p>
<p>Kevin Davies suggests that the “real” corporate tax rate in Australia, taking account of dividend imputation, is <a href="https://theconversation.com/australias-company-tax-burden-is-just-a-myth-10433" target="_blank">below 20%</a>.</p>
<p>But that assumes a closed economy. The reality is that the imputation system subsidises some domestic investors – especially tax-free retirees with self managed super funds – while pushing the full weight of company tax onto foreign investment, at the expense of the economy as a whole, and at the expense of Australians who could potentially benefit from that investment.</p>
<p>The political heat generated by Labor’s proposal to end the payment of imputation cheques to <a href="https://www.afr.com/personal-finance/superannuation-and-smsfs/retirees-mobilise-to-stop-franking-credit-change-20181119-h18290" target="_blank">retirees who don’t pay tax</a> shows their high value to domestic investors. Self-managed super funds are <a href="https://www.intelligentinvestor.com.au/the-franking-elephant-in-the-room-1888156" target="_blank">massively overweight in stocks that provide imputation credits</a>, skewing the Australian share market and the dividend policy of our largest companies.</p>
<p><strong>Does it matter?</strong></p>
<p>Australia’s high company tax rate, and the bias in our imputation system against foreign equity, mean that large multinationals will increasingly borrow to finance Australian investment rather than issue shares.</p>
<p>They will get tax deductions for outbound flows of interest, service fees and royalties, while shifting more and more of their sales, marketing and intellectual property offshore where they can.</p>
<p>Australia can, and is, clamping down on profit shifting, but it’s a never-ending battle.</p>
<p><a href="https://taxpolicy.crawford.anu.edu.au/publication/ttpi-working-papers/12644/australias-high-company-tax-rate-and-dividend-imputation-poor" target="_blank">A bold suggestion </a>is that we should scrap our system of dividend imputation and use the money saved to dramatically cut the rate of company tax. It would make Australia much more attractive to foreign investors, although much less attractive to retirees.</p>
<p>Another idea <a href="https://theconversation.com/heres-a-long-term-budget-fix-that-would-boost-investment-replace-company-tax-with-cashflow-tax-108347" target="_blank">aired in The Conversation late last year</a> is that we should make new capital investment fully tax deductible, turning company tax into a “cashflow tax”.</p>
<p>What we’ll probably end up with is a compromise – a combination of permitting greater deductions for new investment and lowering the rate will be the answer, while limiting or ending dividend imputation.</p>
<p>There’s much to be proud of in being a weird mob.</p>
<p>But as David Ingles and I argued in a <a href="https://taxpolicy.crawford.anu.edu.au/publication/ttpi-working-papers/12216/australias-company-tax-options-fiscally-sustainable-reform" target="_blank">research paper</a> last year, it is not smart to ignore what’s happening in other places.</p>
<p>It is true we are geographically isolated, and it is true our resources make us different, but we exist in a global tax environment in which investors consider tax when they decide where to put their money. It is beyond our control.</p>
<p><em><strong>Miranda Stewart </strong>is a Professor at the University of Melbourne</em></p>
<p><em>This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/new-figures-put-it-beyond-doubt-when-it-comes-to-company-tax-we-are-a-high-tax-country-in-part-because-it-works-well-for-us-109875" target="_blank">original article</a>.</em></p>
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When it comes to company tax, we are a high-tax country, in part because it works well for us: Miranda Stewart

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<p>GUEST OBSERVER</p>
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<div class="column">The Department of Finance released the March monthly financial statements on Friday.</div>
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<div class="column">This note examines the latest data.</div>
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<br>Budget improves: In the twelve months to March 2017, the Budget deficit stood at $38.6 billion (around 2.3 per cent of GDP), up from $37.53 billion deficit in the year to February but better than the average deficit over the past year of $39.3 billion. Average growth in company tax revenues in the last three months has been the best in 41⁄2 years.</div>
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<br>Lower-than-expected deficit: The Department of Finance says the “the underlying cash balance for the financial year to 31 March 2017 was a deficit of $38,907 million, which is $1,361 million lower than the 2016-17 Mid-Year Economic and Fiscal Outlook (MYEFO) profile deficit of $40,267 million.”</div>
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<div class="column">The Federal Budget remains on track to meet Government forecasts. Not only are rolling annual aggregates showing improvement, so are the so-called ‘profile’ positions estimated by the Department of Finance.</div>
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<div class="column">The Government continues to exercise spending restraint. In fact expenses or payments were $1.5 billion below the so-called ‘profile’ level or government estimates for this point in the year. Revenue also is lifting, $335 million above government forecasts. And the rolling annual level of revenues is growing at a 6.2 percent annual pace, faster than growth in payments for the 23rd straight month.</div>
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<div class="column"><a href="https://www.propertyobserver.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.06.24%20AM.png" target="_blank">Click to enlarge</a></div>
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<div class="column">The Budget is currently in a stronger position than the government’s finance boffins have estimated. The good news is that improvement is coming from both sides of the balance sheet.</div>
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<div class="column">GST revenues are also lifting, currently at record highs for a 12-month period. Spending is growing faster than the growth rate of retail trade suggesting that businesses and service sectors are doing better than goods-dependent operations.</div>
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<div class="column">What do the figures show?</div>
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<div class="column">The underlying Budget deficit for the twelve months to March 2017 stood at $38.6 billion (around 2.3 percent of GDP), up from $37.53 billion in the year to February.</div>
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<div class="column">Smoothed revenues (twelve months to March) were up 6.2 percent on a year ago just down from 6.3 percent in January which was the fastest growth in 42 months.</div>
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<div class="column">Expenses rose by 4.3 percent over the same period.</div>
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<div class="column">In terms of the fiscal balance, the Department of Finance noted: “The fiscal balance for the year to 31 March 2017 was a deficit of $37,365 million, which is $6,381 million lower than the 2016-17 MYEFO profile deficit of $43,746 million. The difference results from higher than expected revenue and lower than expected expenses.”</div>
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<div class="column">Revenues: “Total receipts were $334 million higher than the 2016-17 MYEFO profile.”</div>
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<div class="column">Expenses: “Total payments were $1,516 million lower than the 2016-17 MYEFO profile.”</div>
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<div class="column">The Government currently expects an underlying deficit of $36.514 billion for 2016/17 (around 2.3 per cent of GDP).</div>
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<div class="column">Receipts from the Goods and Services Tax stood at a record $62.0 billion in the twelve months to March, up 5.7 percent on a year ago, and above the 5.4 per cent growth over the last twelve months. The Government has forecast GST receipts of $62.41 billion for the entire 2016/17 year.</div>
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<div class="column">Actual GST receipts for the nine months to March stood at $46.331 billion, just below the Budget ‘profile’ of $46.349 billion.</div>
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<div class="column">What is the importance of the economic data?</div>
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<p><span>The Department of Finance releases the </span><span>Government Financial Statements </span><span>(Niemeyer Statement) almost every month. The statement allows investors to track the current Budget position and provides insights into the effectiveness of fiscal policy. </span></p>
<p><span>What are the implications for interest rates and investors? </span></p>
The Federal Budget is on track to meet forecasts. Spending restraint is driving the improvement. Fiscal policy is more neutral at present, as is monetary policy.</div>
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<div class="column">There is no room for complacency. The Budget may be showing cyclical improvement, but in 2017 all political parties need to stay focused on fundamental tax reform to drive medium-term improvement in the fiscal position.</div>
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<div class="column"><a href="https://www.propertyobserver.com.au/images/2017/05/08/Screen%20Shot%202017-05-08%20at%208.05.21%20AM.png" target="_blank">Click to enlarge</a></div>
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<br>One missing ingredient in recent times has been the absence of growth in company tax revenues. But average growth in the last three months has been the strongest in 41⁄2 years. </div>
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