Its main brief was to consider how to cut the company tax rate (currently 30%) on a revenue-neutral basis, fully funded by other reforms to the business tax base. The Review of Australia’s Future Tax System (AFTS) had recommended a cut to 25%, and the government proposed (then delayed) a cut to only 29%. Some of the possible “savings” include tightening cross-border debt safe harbours for business; removing the research and development or exploration tax concessions; or modifying depreciation of assets.
The Working Group report pulls no punches. It has signally – and explicitly – failed in this task. After much consultation and, no doubt, robust discussion, they note the “considerable debate and uncertainty” about winners and losers from a company tax cut funded by removal of concessions. They conclude, dryly, that “there is a lack of agreement in the business community to make such a trade-off”.
The AFTS Review suggested that Australia’s company tax is borne partly by labour – in fewer Australian jobs and lower wages – as well as by capital. But empirical evidence is lacking. A recent US report by the Urban-Brookings Tax Policy Center attempts to put some numbers to this analysis. It now builds into its models an assumption that 20% of company tax is borne by labour, 20% is on the “normal” return to capital, and a whopping 60% is “super profit” or above-normal rates of return.
According to economic theory, we should be able to tax corporate super profit at nearly 100% and not deter investment. But legally and administratively, that is hard to do. The situation of Australian companies may also be different, given the very valuable intellectual property owned by American companies. In this light, however, the current 30% tax rate seems like a crude but reasonable compromise.
Finally, last week we learnt the MRRT has so far failed to raise any revenue for the government. Some of this is down to lower commodity prices, and price projections that were far too rosy. The MRRT is supposed to capture some of that corporate “super profit”. This result suggests a sad outcome of hasty compromises between big miners and government on the rate of the MRRT, the very high uplift factor for investment, too generous valuation thresholds for existing projects and the exclusion of all minerals except iron ore and coal. It’s a salutary lesson of how not to do tax reform.
The current language of business tax reform is “international competitiveness”, and this is picked up by the Working Group. But we should not be distracted by this slogan. The Working Group report is a start: there are no easy fixes. Business tax reform requires more research into the economic and distributional issues to generate an acceptance of basic principles which we don’t yet have, and a nationwide public debate.
Miranda Stewart is a professor and director of Tax Studies, Melbourne Law School at University of Melbourne.
This article was first published at The Conversation.
