Reforming corporate income tax in Australia

Submission to the Productivity Commission Dynamics and Resilient Economy Interim Report

 

The Australian Industry Group welcomes the opportunity to provide feedback on the Productivity Com-mission’s (PC) Creating a more dynamic and resilient economy – interim report with respect to its pro-posals regarding reform of corporate taxation in Australia.

Australia’s system of corporate taxation is in urgent need of reform. Our tax system is excessively com-plex, with the historical accretion of convoluted rules for the treatment of business income and deduc-tions raising compliance burdens and distorting behaviour. It is also internationally uncompetitive, with corporate income tax rates well above either the OECD average or those of peer economies.

These problems in the corporate tax system have reduced our investment performance, lowering growth and productivity outcomes to the detriment of all Australians.

The Australian Industry Group argues that three well-accepted principles should inform tax reform ef-forts. Business taxes should be simple, investment augmenting and internationally competitive. We com-mend the PC for adopting these principles in its interim report, making investment performance and competitiveness the centrepiece of its examination of reform options for the corporate taxation system.

However, we contend that the PC’s reform proposal – to lower the statutory company tax rate to 20% for businesses under $1 billion turnover and introduce a 5% net cashflow tax on all businesses – fails to achieve these core principles for effective tax reform. Through a detailed analysis of its economic impacts, this submission shows that the PC’s proposal suffers from several adverse consequences:

1. Introduces additional complexity to Australia’s corporate taxation system when complexity should instead be reduced
2. Does not increase Australia’s overall international tax competitiveness, and weakens it in the areas where we currently attract the bulk of inward foreign investment
3. Improperly targets ‘economic rents’ by arbitrarily raising taxation on all large companies irre-spective of their earning of rent income
4. Creates a disincentive to business growth and international expansion by erecting a steep tax increase at the $1 billion turnover threshold
5. Introduces distortions regarding business investment and financing which will discriminate be-tween industries and impose efficiency costs on the economy.

These adverse consequences mean that the proposal in the PC interim report should not be pursued in its current form as a reform path for Australia’s corporate taxation system.

However, there is considerable merit in several of the objectives of the PC proposal, particularly its core intent to lower company tax rates to raise investment levels and restore international tax competitive-ness. With appropriate adjustments, an alternate proposal reform which avoids these adverse conse-quences could be developed.

We identify three future avenues for investigation that the PC should pursue in developing its final report, with a focus on alternate options for lowering statutory company tax rates, simplifying income and de-duction rules for company tax, and evaluating the benefits of reforming businesses taxes beyond company tax.