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Sunday, February 26, 2017

Cut company tax and you cut national income: Grattan

The Turnbull government's proposed company tax cut would drop national income for years before it boosted it and would never be self-funding, a new analysis from the Grattan Institute has found.

One of the key justifications for the proposed phase down in the company tax rate from from 30 per cent to 25 per cent over 10 years has been that it would boost national income and wages.

"Even assuming you get those things in the long run, there will be a period of time in which national income falls," said the director of the Grattan Institute's productivity growth program Jim Minifie.

"That's because you are giving a tax cut to foreigners, meaning the benefit at first goes overseas".

"The Treasury has cited work that says it would take four or more years for investment to respond, lifting Australian national income but it could take a decade."

"The challenge for government is that it would be trying to do that at a time when if is not quite clear whether it can repair the budget. In other words, it's proposal isn't fully funded."

Write-off solution

The Grattan Institute report, Stagnation nation? Australian investment in a low-growth world finds that a cheaper and more effective measure would be an investment allowance that permitted companies to immediately write-off a portion of their investment before depreciating the rest over time.

"One worry is that some firms might be tempted to rort the system by relabeling operating costs as investment, but it might be manageable," Dr Minifie said.

The government could do both, allowing the investment allowance to fill the initial hole in national income that would be created by the company tax cut, but it would have to specify how it was going to pay for both.

Other measures were even less attractive. A tax cut for small business was "hard to justify" as a means of boosting investment while accelerated depreciation delayed tax payments.

An "allowance for corporate equity" of the kind proposed by the former treasury secretary Ken Henry would treat payments to shareholders in the same way as interest payments, meaning no tax would be paid on projects yielding an ordinary rate of return, and higher rates would be paid on those yielding more.

It would make projects that were only mildly profitable more attractive, but it would be hard to implement because it would create losers as well as winners.

Non-mining investment had fallen from 12 per cent to 9 per cent of GDP, lower than at any time in the fifty years from 1960 to 2010. But it was important to keep the problem in perspective.

In The Age and Sydney Morning Herald