Thursday, February 26, 2009

A lower company tax rate? Swan wants it.

TREASURER Wayne Swan has backed a push by the head of his tax review for a much lower corporate tax rate.

Announcing a series of "town hall" consultations to take place next month in every Australian capital and also in Geelong and Wagga Wagga Mr Swan said that Australia's 30 per cent corporate tax rate was becoming uncompetitive.

The ninth-lowest rate in the OECD at the start of the decade, it had become the eighth-highest.

An OECD official speaking at the same Canberra conference said Australia's position was even less competitive than those figures suggested. Australia's reliance on corporate tax was exceeded only by Norway's which very heavily taxes the income from North Sea oil...

The conference was told that that the typical corporate tax rate is falling by one percentage point per year, a decline which if continued would result in a zero rate before the middle of the century.

Throughout the OECD developed nations were moving away from taxing corporate profits towards taxing the income of the shareholders that benefited from that those profits.

The UK and all of mainland Europe had abandoned Australian-style dividend imputation schemes that provided tax breaks to shareholders and instead cut the tax rates applying to the companies themselves.

Australia and New Zealand and the only two developed nations to retain such schemes.

Calculations by the Melbourne consultancy Lateral Economics reported in The Age Tuesday suggest that abolishing dividend imputation would fund a cut in Australia's corporate tax rate from 30 to 19 per cent.

Lateral Economics says the ultimate corporate tax rate could be cut even lower if the new rate boosts the size of the Australian economy in the way it expects.

The experience of Britain and Ireland suggests that such a cut in Australia's would boost foreign direct investment in Australia by as much as one-quarter.

Economists from the Australian School of Business warns that such a benefit needs to be balanced against a move away from equities by local investors who value imputation credits.

"Also the reduction in after-tax returns for local investors would create an incentive for local firms to either reduce dividends or abolish dividends altogether, said Senior Lecturer Dr Ronan Powell. "This could have the positive effect of freeing up funds for internal investment, but there is a trade-off that needs to be carefully considered."

Mr Swan backed an claim by the head of the Henry Review, Dr Ken Henry that a competitive corporate tax rate could boost economic growth by increasing the quality and quantity of investment, boosting productivity and real wages.

"We need a tax system that is internationally competitive and the arguments
for reducing company tax rates are something the review panel will need to consider," the Treasurer said.

Mr Swan told the conference he regarded it an incitement of the Australian tax system that almost tow thirds of Australians used a tax agent to file their returns. In other countries the figure was 30 per cent.

"Surely we can design a tax return system simple enough to make this
sort of cost to working families unnecessary. As a matter of principle, working families should not have to pay hundreds of dollars per year to accountants to fill out their tax return," he said.


Marek said...

Personal tax returns are fairly complex, Its the only area of tax in which i have any tax knowledge. I help out with most of my friends tax returns, even those who work in accounting give me a call as they all work in audit and corporate tax. We have done a few experiments on how much we can "push out" our returns(we have reciepts, but....), we are nearly convinced that no one checks what is being claimed, or what we consider ridiculously large claims are simply average!

timboy said...

Dividend imputation really should go. Local investors will be compensated through higher share prices, and larger capital gains.

The super funds won't like it- they like their imputation credits. But they also get discounted capital gains- so there is a trade off there.

I guess the question is should we turn down a massive increase in foreign investment and a lower corporate tax rate just for the sake of the local super industry?

Financial crisis aside, they seem to be pretty well looked after from a legislative perspective.

My gut feeling is the benefits will outway the costs- however I haven't done the modelling on it. Have you Peter?

Marek said...

Don't all Australians have a stake in the local super industry? By making it harder for them don't we just make it harder for ourselves(long term)?

As we have seen recently foreign investment can leave very very quickly.

1jasonoz said...

I think we will get a cut in the corporate rate with imputation being the source of this reduction. The BIG question is will it be the full reduction down to say 19% (unlikely as to many voting lossers), or will be get a part reduction to say 25% (likely as less pain for voters and Swan can beat his chest about cutting rates).

Personnely i would like the rate to drop to 19%, with the second move to be undertake real income tax reform such as broadening the tax base, reducing Howards wastefull welfare spending back to a safety net and undertake across the board tax cuts starting at the bottom end and the 40% rate.

Marek said...

I suspect 1jasonoz, is right, the rate will go down but not to 19%, cutting back on middle class welfare would be a real change. Not only good economically but socially as well.

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