How Turnbull can back down on company tax, 'obviously'

How do you walk away from something to which you’ve committed your soul? You say things have changed, “obviously”.

It’s how marriages end in divorce, how deputies abandon their prime ministers and how Labor treasurer Wayne Swan quietly but spectacularly abandoned his absolute commitment to a budget surplus in late 2012.

He had been holding the line for half a decade, promising in his first budget “the largest surplus as a share of GDP in nearly a decade”, and then in his second, after the surplus evaporated during the financial crisis, “hard choices that chart the course back to surplus”.

In his third it was a “return to surplus in three years' time, three years ahead of schedule, and ahead of every major advanced economy”.

In his fourth it was an upgraded surplus, “back in the black by 2012‑13, on time, as promised”.

And then in his fifth, an even grander pledge: “Madam Deputy Speaker, the four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.

“This budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time. The deficit years of the global recession are behind us, the surplus years are here.”

Along the way he contorted language to avoid even conceding the possibility that he would never deliver a surplus.

“Let me hear in plain English that the budget is within a hair’s breadth of going into deficit,” the ABC’s Kerry O’Brien asked him as the financial crisis gathered pace. “It seems silly to me that anybody would bother to argue that proposition. Will you accept going into deficit, if you have to, to maintain appropriate stimulus of the economy under the threat of recession and high unemployment?”

Swan: “Kerry, it would be silly to speculate along the lines of your question.”

O’Brien: “Why?”

Swan: “Because I've made it clear. We are projecting modest growth and modest surpluses, but if the situation were to deteriorate significantly it would have an impact on our surpluses and it may well be the case that we could end up in the area that you're speculating about.

O’Brien: “Well, say it. In deficit.”

Swan: “I am not going to say it because we're projecting modest surpluses.”

Incredibly, in October 2012, a year before Labor lost office and four months into the financial year that was meant to deliver the continually forecast surplus, the mid-year budget update still penciled one in, albeit assisted by fancy accounting tricks. It was “absolutely appropriate to stick with our surplus objective”, Swan told reporters.

Until December 20, days before Christmas, at which point Swan opened a press conference expressing dismay that the October tax receipts had been well below forecasts.

“Obviously, dramatically lower tax revenue now makes it unlikely that there will be a surplus in 2012-13,” he intoned, as if he had been caught unawares. “A sledgehammer hit our revenues.”

I’ve retold that story to make it clear that even the most unlikely backdowns are easy for politicians, even after repeated declarations of undying fidelity.

All through the on-again off-again negotiations with senators over the company tax cuts, Malcolm Turnbull has maintained that he is “absolutely” committed to the remaining $35.6 billion, and, if necessary, will take them to the next election.

“The Prime Minister did not leave any wiggle room at all,” said his chief negotiator, Mathias Cormann, in February at an earlier time when it looked as if hope had been lost. “We are completely and utterly committed to our business tax cuts. They were very necessary at the last election, we took them to the last election. They will be even more important by the time of the next election. If the Senate were not to pass these very important business tax cuts, yes, we will fight for them at the next election.”

No wiggle room.

Until a moment of zen on Tuesday after Pauline Hanson had what is probably her fourth change of heart.

“We might not ever get to that point,” Cormann said when asked if the company tax cuts might ever get through the Senate. He repeated, for emphasis: “It might well be that we won’t ever get there.”

Cormann insists that he wasn’t paving the way for a last-minute backdown, but if it happened, just before the election, the lines would be delivered without shame, as were Swan’s when the economy and his government headed south. Things would have changed, “obviously”. Cormann would have $35.6 billion more to offer in real tax cuts - income tax cuts - to people who vote.

And probably much more. The Coalition won’t reveal the updated 10-year budget cost of its company tax cuts because it doesn’t want Labor to know how much it will have to offer that it can’t.

Like Labor, it could promise to revisit its company tax cuts later, when the budget and the Senate permitted.

It’d be acknowledging reality, shamefacedly, and promising more to voters now, rather than years down the track when the small and uncertain impact of uncertain company tax cuts worked its way through the system.

In The Age and Sydney Morning Herald

Read more >>

Company tax cuts: all right for some

Parliamentary debates don’t matter much any more. We were never going to get much of one if the government had submitted its company tax bill to the Senate.

It was planning to ram it through as soon as it believed it had the numbers, if necessary sitting beyond midnight on Wednesday.

But when it discovered it didn’t have the numbers, the Coalition decided not to submit the bill at all, meaning no debate, until - if and when - it gets the numbers. Then it will probably revert to Plan A - and ram it through.

Which is a pity, because a proper parliamentary debate might have teased out what would actually happen in the event that company taxes were cut.

So much of what is proposed has been modelled and examined and tried out in the United States that we’ve got a pretty good idea of what would happen, one that’s worth sharing in case the idea comes back.

Employment

Put to one side any suggestion that a cut in the rate of company tax will create jobs. And there have been many such suggestions, from the Prime Minister, the Business Council, and Finance and Treasury ministers Mathias Cormann and Scott Morrison. Their own departments’ modelling comes up with a gain in employment of just 0.1 per cent - so embarrassingly low as to be indistinguishable from a rounding error. That's if the cut is funded by either higher personal taxes through bracket creep or by cutting government spending.

The gain would be higher, but still low, if the company tax cut was funded by a Thatcher-style fixed levy imposed on households. Separate independent modelling commissioned by Treasury as a check comes up with an even lower, barely perceptible, gain of 0.04 per cent, which has since been revised down to a barely perceptible loss of 0.02 per cent.

The reason why a company tax cut would on balance destroy as many jobs as it creates lies in its chief virtue: extra foreign investment.

When foreigners invest more in their own or in another’s Australian operations, the operations will find it easier to expand, either by employing more people or by investing in more modern equipment (which will mean there is less need to employ as many people). In the modelling, the two effects roughly cancel each other out.

Investment

A company tax cut will push up after-tax returns and make propositions that were previously line-ball more attractive, but not for everyone. Australians (and also some well-advised foreigners) are already as good as exempt from company tax through the dividend imputation system. It refunds to shareholders whatever tax has been paid in the creation of dividends, making the company tax rate close to irrelevant.

But some foreigners will find investing in Australian companies or their own Australian operations more attractive. The Treasury thinks the tax cut will boost investment by an eventual 2.6 per cent, although it has been acknowledged that in the first months of Trump tax cuts this year, investment in the US went sideways rather than climb as expected. What did climb were share buybacks, which are a means by which companies distribute windfall gains to their shareholders as an alternative to ploughing them back into the business. It’s one of four options the Business Council included in a survey of its members about what they planned to do with Australian tax cuts.

Wages

If foreign owners invest more, either in more workers or in machines that require more skill to operate, they’ll have to pay higher pre-tax wages. They won't do it for some time. This  effect shouldn't be confused with any pledges made about immediate increases for public relations reasons. Post-tax wages won’t increase by as much, in part because the company tax cuts would most likely be partly or fully funded by higher personal tax rates than would otherwise be needed.

The Treasury says pre-tax wages would eventually climb an extra 1.2 per cent, and post-tax wages by a much lower 0.4 per cent. A competing analysis by Victoria University’s Janine Dixon finds that higher income taxes could eat up “most or all” of the increase in pre-tax wages.

But employers would certainly have to pay higher pre-tax wages. Not all of them would reap the benefit of the tax cut. The Council of Small Business says all but 200,000 of Australia’s 2.2 million smallest businesses use the personal rather than the company tax system. The government is offering them an improved Small Business Income Tax Offset, but the total payment under the offset is limited to $1000, meaning many will get nothing to compensate them for the eventual increase in their wage bill, unless they switch to the company tax system.

Windfall gains

Super profitable corporations such as the banks (and mining companies during booms) will enjoy windfall gains. They are already investing what they would. It’s why the Henry Tax Review, lauded by the Business Council, recommended the introduction of a special mining tax “at the same time” as the company tax cut. It’s why Britain, pointed to as an example by the Business Council, imposed an extra tax on bank profits at the same time as its company tax cuts.

They’re ideas worth considering next time around.

In The Age and Sydney Morning Herald

Read more >>

The best case for the company tax cut isn't that good

What’s the best case for a cut in the company tax rate? It’s that we’ll be better off and earn higher wages, eventually.

The modelling published by the Treasury looks at what will happen in the long term, after the company tax rate has inched down from 30 to 25 per cent and everything has settled. That could be in 10 years' time, or it could be in 20.

It produces a one-off change, rather than an annual change. So, in the modelling first published by the Treasury after-tax wages would eventually be 0.43 per cent higher than they would have been. With wage rates at present growing by 2 per cent a year, it’s four months' worth of wage increases, delivered well into the future.

That’s not to say it’s not worth having. It is to say that it would be worth being patient, and the eventual reward would be low by the standards of what happens every year.

The modeller who prepared those projections for the Treasury in 2016 has just updated them to take account of new data. If the company tax cuts are funded by bracket creep (he has also modelled funding them by other means including a lump sum tax, and increase in the GST and cutting government spending) the eventual boost to after-tax wages would become 0.29 per cent rather than 0.43 per cent: about two months' worth of wage growth rather than four. Its a pay rise delivered two months earlier.

The boost to gross domestic product is similarly slight, given the long lead-up. Eventually, after 10 to 20 years, GDP would be 0.79 per cent higher than it would have been according to the original modelling, now 0.72 per cent.

That’s about three months' worth of GDP growth. Whatever GDP was going to reach in 2030, it’ll get there three months earlier with a company tax cut, according to the modelling.

Employment, which wasn’t going to grow much as a result of the company tax cut in the first lot of modelling, will now slip somewhat as a result of the tax switch, but not enough to notice. The company tax cut was always about wage growth, not jobs growth.

And it was going make people better off. The original estimate was for a one-off gain in consumer welfare of $4.5 billion, now a lower $3.8 billion. But it would need to be shared between 24.8 million people, almost certainly more by then. That’s a one-off gain of just $150 per person – two to three months' worth of the internet – after perhaps 15 years of waiting. That’s the best case being put before the undecided senators who are asking for modelling.

Another scenario is worse. Professor Peter Swan, one of the people who can justly claim to be the father of dividend imputation, claimed on Thursday that it wouldn’t materialise. It derives from a jump in foreign investment. If it doesn’t happen, because for foreign investors the effective tax rate is already very low, the other benefits won’t flow.

Swan thinks it won’t happen, because the foreign share investors who are sensitive to tax have already found a way not to pay it. It’s easy enough to hold Australian shares, sell them before dividend time to an Australian who can make use of the tax credit offered with dividend imputation, and then buy them back for less, cutting the foreign’s effective tax paid to nearer zero than the new low US rate of 21 per cent offered by President Trump. That near-zero effective rate wouldn’t much change as a result of an Australian company tax cut, which means foreign investment wouldn't be likely to change much either.

Except for direct investment in businesses or factories started from scratch, and funded independently of the share market. A 25 per cent rather than a 30 per cent rate would help for these businesses, but they are generally not as tax sensitive as might be thought. To physically set up in Australia you need to be certain you’ve got a very good business plan, often based on your own technology or systems, like McDonald's, Aldi or Ikea, to the extent those companies pay tax. The investment proposition needs to look so compelling that tax is a second or third order issue, according to Swan.

Even if Swan is right, there might still be a small case for a company tax cut, but it needs to be set against the much bigger case for personal tax cuts. The Parliamentary Budget Office has bracket creep pushing up the average tax rate paid by middle earners from 14.9 to 18.2 per cent over the next four years. It’s a projection based on the budget’s own figures.

The mathematical truth is that every dollar that is shovelled into company tax cuts can’t be shovelled to us in tax cuts. And we’re likely to need them more.

In The Age and Sydney Morning Herald

Read more >>

'Already zero'. Economist questions company tax cut

A leading economist has criticised the Turnbull government’s company tax cuts, warning the foreign investment benefits are illusory. 

As the Coalition inched closer to a deal with the Senate crossbench on Wednesday to pass the stalled bill, Professor Peter Swan said a largely unknown practice used by foreign investors threatened to erode some of the economic benefit of the $65 billion plan.

University of NSW Business School professor Professor Swan is an expert on investment who advised the Campbell committee of inquiry into the financial system in the early 1980s. His advice led it to propose a system of dividend imputation, whereby company tax payments are refunded to Australians but not foreign dividend holders, a recommendation taken up by Paul Keating in 1987.

His new study on every Australian share traded over the past 14 years concludes foreign owners have largely “exempted themselves from paying corporate tax on marginal investments” by selling their shares to Australians ahead of dividend payments and then buying them back again afterwards.

The tax rules allow so-called recycling or “harvesting” of dividends so long as foreign owners sell the shares at least 45 days before dividends are paid.

“Those who do it face an effective tax rate of close to zero,” Professor Swan told Fairfax Media. “This is an ideal outcome for Australia as we gain the largest and most efficient corporate sector undistorted by taxes.”

But it meant a cut in the company tax rate would be unlikely to trigger a big boost in foreign investment because the foreign investors who were sensitive to tax already had ways to pay very little.

Modelling previously published by the Treasury predicted the company tax cut would boost investment by 2.7 per cent. In addition to stimulating foreign investment, the government argues a reduction in the tax rate from 30¢ to 25¢ in the dollar over a decade will lead to new jobs and more capital investment.

Professor Swan suggested the ongoing annual cost of the tax cut was likely to be $8 billion - more than the government’s estimated $3.7 billion net cost - because the expected boost in foreign investment would not eventuate.

“Where is the case to show that higher investment, even in the unlikely event that it were to eventuate, would yield a gain of this magnitude, even in the longer term?” he asked.

In a statement, a spokesperson for Treasurer Scott Morrison hit back at the claims: “The Turnbull government stands by Treasury’s modelling on the impact and benefits of the Enterprise Tax Plan.

"We need to ensure Australian tax rates for business remain competitive in an increasingly competitive world.”

However, new analysis by ANU economist Chris Murphy, who examined the proposed company tax cut for the Treasury in 2016, has wound back forecasts of the company tax package's benefits.

The new modelling says if company tax cuts were financed by bracket creep, after-tax real wages would eventually be 0.29 per cent higher rather than the previously projected 0.43 per cent. Consumers would be $3.8 billion better off rather than $4.5 billion better off, and gross domestic product would be 0.72 per cent higher rather than 0.92 per cent higher.

Mr Murphy said the changes were the result of updated figures, an improved methodology, and the US switch to taxing territorial rather than world income as part of the Trump tax package.

But he stressed the policy implications were unchanged. Cutting the corporate tax rate would improve consumer welfare, and increase it by more than any other feasible tax change.

For consumers, cutting the company tax rate from 30 per cent to 25 per cent has a benefit that is 2.04 times the costs, a small downgrading of the original estimate of 2.39 times the costs,” he said. By comparison, cutting personal income tax has a consumer benefit-to-cost ratio that is much lower 1.25 to 1.42 times, depending on the nature of the cut.”

Mr Murphy said the data he had examined on the prices at which the rights to dividends were sold did not support the contention that foreign investors were escaping tax by selling dividend rights to domestic investors.

In The Age and Sydney Morning Herald

Read more >>

We'd be mugs to follow Trump on company tax - yet

We were mugs to believe what we were told in the election about property prices. The Prime Minister said if negative gearing went and capital gains were better taxed, prices would be “smashed”. His Treasurer said it would “take a sledgehammer” to prices.

Thanks to Freedom of Information, we now know that the Treasury thought the effects were “likely to be small”.

Now they are telling us that a cut in the company tax rate would bring about an “immediate” jump in wages.

“We would expect the effects to be immediate,” Finance Minister Mathias Cormann told ABC’s AM program last week. “Look no further than the United States” he said. “The effect after the Trump administration was able to pass their tax cuts through the US Congress was as immediate as it was dramatic. Immediately a long list of businesses in America provided wage increases and additional bonuses.”

That’s not how it would work here, and certainly not what the Treasury modelling finds. In the United States, whereas a number of companies did lift wage rates and pay one-off bonuses after the tax cuts in January, most did something different. They announced bonuses to their shareholders, big ones.

In the first six weeks of the year they announced a record $171 billion of stock buybacks. Buybacks are payments to existing shareholders that enrich them directly and help them indirectly by pushing up the price of their remaining shares.

It’s more than double the $76 million of buybacks announced by the same time last year. “It's the largest ever, and nothing has really changed except the tax law," said Jeffrey Rubin, a director of research at Birinyi Associates, which compiled the figures, in an interview with CNN.

It’s probably what you would do if you got an income tax cut. You’d spend a little on yourself, and only later think about working harder. Opinions differ about what companies will do in the future. The International Monetary Fund expects a short-lived boom in investment as accelerated write-off provisions (not present in the proposed Australian company tax cuts) drag planned investment forward. The Moody’s credit rating agency expects little. “We do not expect corporate tax cuts to lead to a meaningful boost in business investment,” it has told its clients. Its thinking was that if record-low interest rates didn’t ignite investment, company tax cuts wouldn’t either.

What our Treasury thinks would happen here is that foreign companies would invest more, because the returns would be greater, and that local firms would use more of their earnings to grow their business. Investment in more and better machines would make workers more valuable and worth outbidding other employers for. It’s a circuitous way to get a wage rise and far from instant. But new research from Germany suggests it exists.

The research examines the effect of 6800 company tax changes over 20 years in a nation in which 10,001 municipalities were allowed to set their company tax rate independently. It finds that workers got 51 per cent of the benefit of (and shared 51 per cent of the the cost of) company tax changes, which is about what other studies find. In a useful caveat for Australia’s union movement, it found the effect was greater where collective bargaining was greater. In a less attractive caveat for Australia, it found the effect was “close to zero” for large firms, firms that operated across borders and foreign-owned firms.

What matters for Australians (but not for company owners, to the extent those owners are offshore) is the effect on household welfare. The Treasury’s modelling of the proposed cut in the Australian company tax rate from 30 to 25 per cent puts the eventual boost to household welfare at between 0.1 and 0.2 per cent. It would be 0.1 per cent if the cut was paid for by letting bracket creep lift personal income tax collections, or 0.2 per cent if it was paid for by a hypothetical lump-sum tax. The Treasury says the nearest to such a thing in real life is a broad-based land tax.

Not everyone agrees that there would be a boost at all. Victoria University’s Dr Janine Dixon finds there would probably be a net cut in living standards, of about $1600 each. The high proportion of Australian firms owned overseas means more money would be lost in tax and have to be made up for by other tax increases than would be gained by the workers whose wages rose.

Our leaders aren't particularly open about how they would fund the revenue they would lose by cutting the company tax (and everyone thinks they would lose something, no one thinks the cut would be self-funding). One suggestion from Dr Chris Murphy, who did some of the modelling for the Treasury, is to lift the GST from 10 to 11 per cent. Another is to impose an extra tax on banks, as Britain did when it cut its company tax rate.

Eventually we will probably have to cut our company tax rate, and cut it below 25 per cent. Tax competition from Donald Trump and others, of the kind our Reserve Bank Governor describes as “regrettable”, will make it inevitable. But there’s no reason to rush, yet. Despite what we are being told, at the moment the benefits just aren’t that big.

In The Age and Sydney Morning Herald

Read more >>

Stoking a fire with gasoline: why Wall Street shuddered

Why did the US sharemarket suddenly tank?

For the same reason that ours might, one day, although there are no signs of it yet.

The US jobs market is on fire. In the past year the United States has hired an extra 2.1 million workers, and not just because of Trump. In the previous year, under Obama, it hired an extra 2.5 million. All up, since the low point in 2009 the US has taken on an extraordinary 18 million additional workers, an extra 14 per cent.

It has pushed the US unemployment rate down from 10 per cent to 4.1 per cent, where it has stayed for four consecutive months. So low is 4.1 per cent that, with the exception of a few months under President Clinton at the height of tech stock mania at the start of this century, you need to go back to 1969, when astronauts first walked on the moon, to find it bettered.

It's low enough to be well below the official best guess of the so-called "natural" rate of unemployment, below which wage rises fuel accelerating inflation. We've got a so-called natural rate in Australia. The best guess is that ours is about 5 per cent, and, although we have been making in-roads into unemployment, we're not down there yet. The US is down there, well into what would normally be lift-off territory for wages and prices, but here's what's strange: all through 2017 and 2016 and 2015 wage growth scarcely budged. It hasn't moved too far away from 2.5 per cent.

Just as in Australia, without a takeoff in wages there's been no reason to fear a big increase in official interest rates. The US Federal Reserve has pushed up rates five times since the improving US economy allowed it to begin moving its Federal Funds Rate away from zero in 2015, but not aggressively. There has been precious little inflation to contain.

Until Friday. US average hourly earnings per employee jumped, enough to push up the annual growth rate to 2.9 per cent. Inflation, and much higher interest rates to contain it, suddenly became real. The US bond rate (which is the market's best guess of future short-term rates) surged. The 10-year bond climbed to 2.8 per cent, up from 2.4 per cent four weeks earlier.

That's a real cost to any business that needs to borrow long-term, and a real cost to the US government, which will need to borrow big to fund Trump's tax cuts. It means the value of US businesses is suddenly lower, because they are valued with reference to their earnings and the bond rate.

It meant shares were suddenly worth less, because when human traders began offloading shares to reflect the new reality the robots took over, automatically selling to protect themselves. Over two days share prices fell 6.4 per cent. On Tuesday night they regained some of that loss, but the future looks different now; more normal, with the value of shares less likely to keep rising as a consequence of low inflation holding interest rates back.

As popular as they have been with business, Trump's planned tax cuts will have themselves pushed up bond rates. The US government needs to borrow hundreds of billions of dollars more because it isn't fully funding them, in contrast to Australia where the Coalition's tax cuts are meant to be funded by making savings elsewhere and allowing other taxes to remain relatively higher so that company tax rates can be pushed relatively lower.

And Trump's tax cuts will hurt in a more fundamental way. Cutting tax is a great way to boost the economy. If the unemployment rate was 10 per cent it would really help. It would lift the economy without stoking inflation. But when the jobs market is on fire and the unemployment rate is about to hit an unnerving 4 per cent, it will add gasoline and make the flames fly higher.

It'll mean even higher interest rates. Trump is rolling out a policy that should be held in reserve for bad times when times are increasingly good. As the International Monetary Fund noted last month, the US will have to tighten its budget in future years to meet the higher interest costs, perhaps in worse times. It is why it has downgraded its forecasts for US growth beyond 2020. It's the opposite of what's normally regarded as prudent management, which is to borrow when times are bad (as Australia did during the global financial crisis) and to repay when they are better (as Australia is trying to do now).

What it'll mean for us is higher Australian government borrowing rates. Our 10-year bond rate peaked at 2.9 per cent on Monday, up from 2.6 per cent four weeks earlier. All other things being equal, the personal income tax cuts we've been promised have become less affordable.

Trump gives the impression of playing with fire rather than managing it. We don't know where it will lead.

In The Age and Sydney Morning Herald

Read more >>

A tick from the IMF but company tax cuts no sure thing

When the International Monetary Fund boosted its forecasts of world economic growth on the back of better prospects in the US this week, Australia's Treasurer Scott Morrison was quick to claim it as an endorsement of company tax cuts.

"These new global growth forecasts demonstrate yet again that the move that's been taken in the United States, but also in other countries, the United Kingdom and France and other parts of the world, to drive their economies and to see their businesses grow, is going to generate growth and jobs," he said.

"Labor is stopping us."

The Fund lifted its forecasts of global growth for this year and the next from 3.7 to 3.9 per cent. It said half of the jump was due to the Trump tax cuts. Its US 2018 US growth forecast climbed from 2.3 to 2.7 per cent and its 2019 forecast from 1.9 to 2.5 per cent.

But much of that boost wasn't due to the most impressive and expensive ($US1.3 trillion) part of the cut; the slicing of the rate from 35 to 21 per cent. It was due to another, cheaper measure: a temporary instant asset write-off. Firms that install new buildings and equipment will be able to deduct the full cost straight away without depreciating it over years. It is similar to, but larger than, capped schemes introduced in Australia by both Labor and the Coalition to boost investment after the global financial crisis and the demise of the mining boom.

Like those schemes, it will be temporary, lasting for five years. Like those schemes, much of it will bring forward investment that most likely would have happened anyway, but later, meaning that when it ends US growth will slump, which is what the IMF expects and one of the reasons it is forecasting weaker US growth down the track.

Australia isn't proposing such a scheme. What the Turnbull government is proposing is a cut in the headline company tax rate from 30 per cent to 25 per cent for all companies, not just those with turnovers of up to $50 million, whose cuts to 25 per cent have already been approved by the Senate.

Will the US cut to 21 per cent, and other cuts including Brtiain's cut to 18 per cent, leave Australia uncompetitive?

It depends on how you calculate competitiveness.

These days John Fraser heads the Commonwealth Treasury. Until 2013 he was head of UBS Global Asset Management and responsible for its worldwide investments. He told a budget forum in Australia in 2015 that while he understood the argument for cutting company tax, his own experience told him that the tax was a "second or third order issue" for would-be investors.

"Generally the internal rates of return that are required – the hurdle rates – are so high it would be false to say the taxation rate, unless they were ridiculous, really large, make a big difference," he said. "It's, frankly, not as important as other issues such as governance and dispute resolution."

Because of the importance of investment allowances, groups such as the US Congressional Budget Office calculates "effective corporate tax rates" that show how much tax will actually be paid on new investments.

Its latest table, released in 2017, but using data from 2012, puts Australia's statutory corporate tax rate at 30 per cent, but Australia's effective rate at just 10.4 per cent. It puts the US statutory rate at 39.1 per cent including state taxes, but the US effective rate at 18.6 per cent. A more recent calculation, from the Oxford University Centre for Business Taxation, put Australia's statutory rate at 30 per cent and Australia's effective rate at 19.1 per cent, below the present US effective tax rate of 23.2 per cent and above the present UK effective rate of 17.1 per cent.

Low rates don't always go had in hand with good business conditions. Oxford identifies Italy, Hungary, Switzerland, Korea, Ireland, the Netherlands, the Czech Republic, Slovinia, Poland and Luxembourg as having the 10 lowest effective rates in the OECD. Most are better known as tax havens than as attractive locations to relocate operations.

To date, Australia has had no shortage of foreign investment, much of it in mining and in Australian shares. Economist Saul Eslake makes the point that if Australia did become starved of investment, the Australian dollar would fall to make it more attractive, which would be a good thing for other reasons.

"Arguably with our currency at 80 US¢ we are attracting too much capital," he says. "Maybe it might be a good thing if we attracted less, because our currency might be more competitive."

He is worried about where the money would come from to pay for the company tax cuts, which would be nowhere near self-funding. Even if they are budgeted for, and Finance Minister Mathias Cormann insists they are, it will be money which isn't available for other purposes, including larger personal income tax cuts.

Director of the Australian National University Tax and Transfer Policy Institute director Miranda Stewart says the company tax cuts could be paid for by abolishing the almost uniquely Australian system of dividend imputation that shields local investors from tax on dividends where the companies have paid tax.

Labor, the Greens and the essential crossbench members of the Nick Xenophon Team simply won't countenance a tax cut for big business however it is funded.

Morrison is going over their heads and appealing to their supporters.

Before Christmas he said while Australians were sitting on the beach enjoying summer, foreign companies would be making decisions and fleeing the country.

This week Qantas chief Alan Joyce pledged to use the windfall that would come from lower tax to lift wages, and Wesfarmers chief executive Rob Scott said he too would pass the benefits on to workers.

In the US, supermarket giant Walmart came good on a similar promise and announced wage rises and cash bonuses for thousands of its workers in the wake of the Trump reforms.

For the moment, Australian voters are not buying the arguments.

The latest poll to ask a question, the Essential survey in December found only 29 per cent of voters approved of the full tax cut for big business. Forty nine per cent rated personal tax cuts as a higher priority.

In The Age and Sydney Morning Herald

Read more >>

Trump's sugar hit to boost world economy - IMF

A sugar hit from the Trump administration's US tax cuts is expected to propel world economic growth to 3.9 per cent in 2018, the best result in eight years.

In an update to its forecasts presented to the World Economic Forum at Davos in Switzerland, the International Monetary Fund said the global economy should grow by 3.9 per cent in 2018 and 2019, up from the 3.7 per cent per year it forecast in October.

Half the upgrade was due to the $US1.5 trillion ($A1.88 trillion) in tax cuts. Its forecasts assume that the hit to US tax revenues will "not be offset by spending cuts in the near term" meaning that the economies of the US and the countries it trades with will benefit as the US budget deficit deteriorates.

It has lifted its forecasts for US growth from 2.3 to 2.7 per cent in 2018 and from 1.9 to 2.5 per cent in 2019.

Beyond 2022 it is expects lower than previously forecast US growth as the next US administration attempts to get the deficit under control and as the "temporary exceptional" five-year tax write-off for investment in business assets expires.

"This short-term growth boost will have positive, albeit short-lived, output spillovers for US trade partners," said IMF director of research Maurice Obstfeld. "But it will also likely widen the US current account deficit, strengthen the US dollar, and affect international investment flows."

Treasurer Scott Morrison welcomed the temporary upgrade saying it "directly contradicts Labor's claim that the Trump company tax cuts have nothing to do with the uptick in economic growth around the world".

"This backs up our positive outlook for Australia's economy in 2018. It is why this government will continue to seek support for our enterprise tax plan."

Only half of the government's $50 billion program of company tax cuts has become law. Company tax is set to fall from 30 per cent to 25 per cent for small and medium-size businesses, but not for big ones.

Mr Morrison said he wanted Australians "to seize the opportunities ahead, rather than be left behind".

The IMF believes the US tax cuts will benefit countries such as China that supply goods and machines to the United States and countries such as Australia that supply the raw materials used to make them.

Much of the growth upgrade is due to a strengthening of the coordinated upswing under way since mid-2016.

The economies of 120 countries, accounting for three-quarters of world GDP, grew faster than expected in 2017 in "the broadest synchronised global growth upsurge since 2010".

Growth was especially strong in Germany, Japan, Korea, the United States, Brazil, China, and South Africa.

The report warns that, as important as lower interest rates have been to the recovery, they have left a legacy of debt, both government and private.

Professor Obstfeld said that although inflation and interest rates remained low for now, a sudden rise from current levels, perhaps due to "pro-cyclical developments" such as the US tax cuts, could tighten financial conditions and prompt markets to re-evaluate debt sustainability. Share prices would also be vulnerable.

A PricewaterhouseCoopers survey of 1300 chief executives released at the forum found 57 per cent expect better economic growth over the next 12 months, almost double the 29 per cent that expected it a year ago.

Among US executives the proportion expecting stronger growth jumped from 39 per cent to 53 per cent.

The US had cemented its position as the most attractive location for investment, named by 46 per cent of the executives, up from 43 per cent.

China was the second most attractive destination, at 33 per cent.

Germany, Britain, India and Japan were the next most attractive locations. Australia fell from the 10th to the 11th most attractive location, nominated by 5 per cent of chief executives.

In The Age and Sydney Morning Herald

Read more >>

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

Read more >>

Company tax cuts built on uncertain foundations

Claims of a boost to living standards from the government's planned company tax cuts rest largely on a dramatic reduction in tax avoidance, a new analysis shows.

Modelling by Canberra economist Chris Murphy for the federal Treasury finds the tax cuts would boost long-run living standards by around $5.2 billion per year, or half of one per cent.

But the bulk of the increase, $3.9 billion, would come from reduced profit-shifting.

The $3.9 billion figure is large compared with estimates of total profit-shifting. In June, an estimate by the charity Oxfam put the total tax Australia lost to profit-shifting in 2014 at between $5 billion and $6 billion. The estimates aren't directly comparable because the $3.9 billion includes the cost of setting up in a tax haven as well as the amount lost to the tax office.

"The $3.9 billion estimate is important because it means most of the benefits from cutting company tax wouldn't come from jobs and growth," said Victoria University economic modeller Janine Dixon. "They would come from the changed use of tax jurisdictions."

"And while the economics of how investment and wages respond to a tax rates is fairly clear, the economics of how tax avoidance responds is more speculative."

Mr Murphy assumed that for every one dollar the company tax rate fell, the cost to the economy from profit shifting would fall 73 cents. He based the assumption on studies of profit-shifting in the European Union.

Dr Dixon said while the European studies might be the best available, that didn't mean they would necessarily apply to Australia.

Without the $3.9 billion gain from reduced profit-shifting, the company tax cuts would boost national income by just $1.3 billion, a barely perceptible gain of 0.1 per cent.

The estimate of a $5.2 billion gain to national income assumed the company tax cut was funded by a lump-sum tax on households. If it was instead funded by bracket creep, living standards would increase by only $4.5 billion, just $0.6 billion more than the cut in profit-shifting. If it was funded by a cut in government spending the boost would be $8.7 billion. But a Treasury paper released with Mr Murphy's paper warned such a cut would not be easy.

Mr Murphy said the main benefit of the company cuts would be that they were self-funding, "to a much greater degree than cuts to other major taxes such as personal income tax or GST".

In The Age and Sydney Morning Herald

Read more >>

2016-17 Economic Survey. Low rates, weak economy ahead

It'll be a year of weaker growth and not enough jobs.

The mid-year Scope BusinessDay economic survey predicts economic growth of just 2.6 per cent in 2016-17, down from the 3.1 trumpeted by the Prime Minister in the election campaign.

The iron ore price should slide from $US60 a tonne at the time of the last budget to $US48. Non-mining business investment, which was budgeted to grow quickly, should scarcely grow at all.

Nominal GDP – the measure that drives tax revenue – would grow far more weakly than forecast, and living standards will slide for the third consecutive year.

The Reserve Bank will most probably cut its cash rate one more time. Four of the 23-person panel expect at least two cuts and two an increase.

The Scope BusinessDay economic survey is Australia's longest running. For the past 30 years it has aggregated the views of financial market economists, academics and industry economists to produce a window into the year ahead and a record against which their predictions can be judged.

Over time its forecasts have proved to be more accurate than those of any of its individual members.

Australia's health

The official 3.1 per cent economic growth rate embraced by Malcolm Turnbull with the words "so far, so good" won't continue.

Only two of the panel expect that much growth in the coming financial year, and none expect more. Most expect much lower growth close to the budget forecast of 2.5 per cent.

Three expect just 2 or 1 per cent.

On balance the panel expects no lift in growth in either the US, China or the world as measured by the International Monetary Fund.

Around the world

After Brexit, it sees a Trump presidency as the biggest downside risk.

"A Trump victory would be contractionary for global growth in the short term due to uncertainty," says former BusinessDay forecaster of the year Stephen Anthony. "It should then be broadly neutral as policy gridlock ensues."

BT Financial Group chief economist Chris Caton has two words: "God forbid!"

"We can only hope that he is not as mad as he seems, and that he will be restrained by Congress," he adds.

"In that case, the market impact will be large but temporary and the economic impact will be slight."

Saul Eslake fears US bond holders will "take fright" pushing up US rates, weakening the US economy and the dollar, and putting unwelcome upward pressure on Australia's dollar.

Global uncertainty has already pushed Australia's 10-year bond rate to a record low of 2 per cent. On balance the panel expects no further falls, and a lift to a still-low 2.4 per cent.

Sensitivity analysis included in the budget suggests a slide in the iron ore price to $US48 a tonne would cut more than $4 billion from government revenue in the first year. But the central forecast conceals a wide range.

David Bassanese and Bill Mitchell expect the price to slide to as little as $US35 a tonne. Mardi Dungey and Chris Caton expect a rebound to $US60 a tonne. Stephen Koukoulas expects $US70 and Neville Norman expects $US78.

On balance the panel expects Australia's terms of trade to slip a further 1.6 per cent.

GDP

Business investment should continue to slide. Mining investment is forecast to plummet a further 24 per cent after sliding 27 per cent in 2015-16 and 17 per cent in 2014-15.

That's in line with the budget forecast. But whereas the budget expects other non-mining investment to bounce back, climbing 3.5 per cent, on balance the panel expects next to no improvement, although its range of forecasts is wide, from a fall of 4.5 per cent to an increase of 5 per cent.

Julie Toth, of the Australian Industry Group, whose members would need to make the investments, predicts a fall of 2.5 per cent.

The panel expects nominal GDP to grow by just 3 per cent, well short of the 4.25 per cent on which the official budget deficit forecast depends.

One forecaster, Steve Keen, expects nominal GDP to fall. Three, Guay Lim, Richard Yetsenga and Janine Dixon, expect faster growth than does the budget, of 4.5 to 4.9 per cent.

The budget papers predict an improvement in the deficit from $39.9 billion in 2015-16 to $37.1 billion in 2016-17. The panel doesn't believe it. Its median forecast is for a deficit of $40 billion in both years. (The average forecast has been pushed higher by one extraordinary forecast of $70 billion, made on the grounds that the government will have to fight off a recession.)

Real net national disposable income per capita, regarded by the Bureau of Statistics as the best measure of Australian living standards, has been falling for nine consecutive quarters.

The panel expects it to slide for yet another year, slipping a further 1.7 per cent to be down 5.6 per cent since December 2013 and 8 per cent since the peak of the mining boom in September 2011.

Only two of the panel expect it to get worse. Fourteen expect it to sink.

Property

The panel expects household spending to climb 2.6 per cent in line with budget forecasts as saving rates are wound back.

Housing investment should climb just 2.9 per cent in 2016-17 after climbing 8 per cent in 2015-16.

Sydney and Melbourne home prices should climb much more sedately than in the past year at 3.6 and 4.2 per cent.

The panellist who ought to know the most about home prices, Shane Garrett of the Housing Industry Association, predicts 6.3 and 6.9 per cent.

Economic modeller Mardi Dungey, of the University of Tasmania, expects the highest price growth, a further 12 per cent in each city.

The "Doctor Doom" of house prices, Steve Keen is predicting falls of 2 and 4 per cent, but he is not alone. Stephen Koukoulas expects falls in both cities, Jakob Madsen expects a fall in Sydney and David Bassanese in Melbourne.

Inflation should climb up from its present extraordinary low of 1.3 per cent to 1.9 per cent, which is just below the bottom of the Reserve Bank's target band, but it'll probably take another cut in the Reserve Bank cash rate to do it.

Most of the panel expect a cut from 1.75 to 1.5 per cent by December. One (Saul Eslake) expects it to be reversed in the first half of next year.

Five expect deeper cuts; Shane Oliver, Michael Blythe and Tom Skladzien to 1.25 per cent and Stephen Anthony and Steve Keen to 1 per cent. Two, Mardi Dungey and Neville Norman expect the RBA Bank to aggressively push up the cash rate, to 2.5 per cent and 3.25 per cent.

Markets

Forecasts for the Australian dollar follow those for the cash rate. Stephen Koukoulas expects the dollar to climb to US79 cents by December and to US83 cents by the middle of next year.

He thinks the Reserve Bank won't need to move at all during that time as the US consolidates its economic recovery, China stabilises and Europe starts to pull ahead.

It would be good news for the S&P/ASX200 share index, which he sees hitting 6000 by the end of this calendar year and 6260 by June.

"Locally, the dollar at US75 cents plus or minus 5 per cent is providing a bit of a fillip for exporters and import-competing industries," he says.

Toward the pessimistic end of the scale is trade union economist Tom Skladzien who sees the Aussie at US67 cents by June and the share index down to 5500.

"The Australian economy and, I'd argue, a lot of other economies are just cruising along, not being really boosted by anything and performing under capacity," he says.

The average forecasts for dollar and the S&P/ASX200 share index by June are US70 cents, a decline of 8 per cent, and 5605, an increase of 6 per cent.

Employment

The range of forecasts for the unemployment rate is unusually narrow, almost all near the present 5.7 per cent, where there would be just enough jobs created to absorb the new entrants to the labour force but no more.

Wage growth, although low at 2.3 per cent, would be comfortably ahead of inflation at 1.9 per cent.

In The Age and Sydney Morning Herald

Cut negative gearing, not company tax, economists say

If Australia's top economists were deciding the election, they'd vote for Labor's cuts to negative gearing and against the Coalition's cuts to company tax.

Of the 23 leading economists polled for the Scope BusinessDay Economic Survey, those that answered the questions about tax backed Labor's plan 10 to three and opposed the Coalition's plan 10 to six.

The key objection to the Coalition's company tax cuts was that they would have to be funded, most likely from bracket creep, higher taxes, or cuts to government spending. Estimates of the ongoing cost range from $9 billion to $13 billion per year.

"The money should come from reducing superannuation tax breaks, negative gearing tax breaks and other forms of upper class welfare," said BIS Shrapnel chief forecaster Richard Robinson.

"On balance, it is not a good idea. There are very little or dubious benefits for such a large outlay that could be better used to reduce the deficit. If higher investment is the aim, it's better to use targeted investment incentives, R&D tax breaks, and improved workforce skills via higher education spending."

Industry Super chief economist Stephen Anthony said much of the money should be found by paring back corporate welfare, but he said even if it was the tax system would become more heavily reliant on personal income tax which did "not sound efficiency improving".

Saul Eslake said evidence from the OECD showed the biggest bang for the buck came from cutting taxes for new rather than existing businesses, "which would be cheaper than a general company tax cut since there are by definition fewer new businesses."

A supporter of a cut, Monash University researcher Jakob Madsen, said it should not apply to mining companies, builders or property developers and banks because they would "just pocket the extra profit without creating jobs".

The results echo those of a survey conducted by the Economic Society of Australia this week which found that Australia would receive a bigger long run benefit from spending on education than spending the same amount cutting company tax.

Supporters of Labor's plan to wind back negative gearing and capital gains tax concessions generally agreed with the proposition that they would result in lower house prices than otherwise, but said that was a good thing.

"Halving the capital gains discount on housing investment returns is overdue and has arguably been one of the worst policies enacted under Howard-Costello," said BIS Shrapnel's Richard Robinson.

In The Age and Sydney Morning Herald

Scope BusinessDay Economic Survey: How they got 2015-16 wrong

There's an awful lot our panel got wrong about 2015-16.

Like the Treasury, it expected creditable growth in nominal GDP of 3.5 per cent, enough to lift profits and company tax and eat into the deficit.

Instead it languished at 2.5 per cent, less than even the most dire of the panel's pessimists predicted.

Like the Treasury, the panel hadn't expected the iron ore price to fall as far as it did. It predicted a ASX200 share index of around 5800. Instead it'll be closer to 5200.

Australia looks like collecting less company tax in 2015-16 than in any year since 2010-11.

While right about mining investment (the panel expected a slide of 25 per cent) like Treasury it expected a bounce in non-mining investment. Instead non-mining investment slid a further 2 per cent.

This year Treasury has pushed out its forecast of a recovery by another financial year. Our panel hasn't. It's expecting next to no growth in the next 12 months, having learnt from history.

Like just about everyone, it got inflation spectacularly wrong. Its average forecast for underlying inflation was 2.5 per cent, right in the middle of the Reserve Bank's target band.

Instead the underlying rate slid to 1.55 per cent and the headline rate to 1.3 per cent. Although still far too high, Neville Norman came closest, expecting 2.1 and 1.8 per cent.

But he was wrong about other things, expecting far too high nominal GDP growth, just as Steve Keen who was right about non-mining investment expected far too high inflation.

This year there's no award for the best forecaster. None of our panel emerged looking good.

The 10-year bond rate looks like ending the financial year below 2 per cent, an all-time low. Our panel had expected it to climb rather than fall.

This year there’s no award for the best forecaster. None of our panel emerged looking good.

The UK bond rate is close to 1 per cent and the German rate is less than zero.

It was also more or less right on the Reserve Bank cash rate, on balance expecting no change, which is how it would have turned out had the board not sneaked in a half-hearted cut on budget day.

On some measures it was too pessimistic. Only Stephen Koukoulas picked a headline GDP growth rate of more that 3 per cent.

Most of the forecasts has a "2" in front of them and some had a "1". It was also far too pessimistic on jobs. Most of the panel expected the unemployment rate to climb rather than fall.

Only Renee Fry-McKibbin and Shane Garrett picked something close to 5.7 per cent.

The contours of the panel's mistakes tell us much about the way the economy surprised us all in 2015-16. It was better on the surface, worse underneath.

In The Age and Sydney Morning Herald

Read more >>

Company tax cuts won't spark investment explosion says treasury chief John Fraser

The push to cut Australia's 30 per cent company tax rate in order to attract more investment has reached a roadblock in the form of John Fraser, the former investment manager who now runs Australia's treasury.

Mr Fraser told a budget forum in Melbourne on Friday that while he understood the argument about attracting more investment, his own experience told him that tax rates were a second or third order issue for corporates considering investments.

Mr Fraser headed UBS Global Asset Management in London for twelve years before returning to Australia in December to rejoin the treasury.

He told the Grattan Institute forum other factors were more important in making investment decisions.

"Generally the internal rates of return that are required - the hurdle rates - are so high it would be false to say the taxation rate, unless they were ridiculous, really large, make a big difference. Whether the tax rate is 30 per cent or 35 per cent frankly is not as important as other issues such as governance and dispute resolution," he said.

Exchange rate risk was also important.

"The rule of thumb for most big firms looking at acquisitions, I'll put a number on this: it's well above 20 per cent, because things go wrong."

For Australian firms, especially small and medium sized ones, the tax rate did matter, and he supported cutting the corporate tax rate to help them. But dividend imputation made the tax rate less important for bigger firms.

Dividend imputation refunds to Australian shareholders tax that companies have already paid creating their dividends.

A plea in the treasury's tax discussion paper for the government to consider removing dividend imputation appears to have fallen on deaf ears.

Asked his own view, Mr Fraser said the government had "made its views clear" and he wasn't going to stroll into the issue. But he added: "in the longer term it's something you've got to look at, it is something I would hope one day will be looked at holistically"

He had already had several sessions with big accounting firms seeking their input into the tax white paper due in December.

"What we need are real life experiences," he said. "The industry associations are very professional and very good, but often the circumstances of particular companies differ greatly. That's why we've got this big engagement process over the next few weeks."

"The tax system is designed for another era, it's a FJ Holden. We've got to have a good look at it because when reform does come I suspect we will be stuck with it for 30 years.

"We've got to have a few warriors out there."

In The Age and Sydney Morning Herald

Read more >>

Tax white paper: More GST, less income tax

The Commonwealth Treasury has set out the case for an increase in Australia's rate of goods and services tax and a series of cuts in income and company tax, saying that at 10 per cent, Australia's GST is one of the lowest in the developed world.

In a discussion paper released to encourage contributions ahead of a white paper that will set out the government's priorities on tax, the Treasury says that of the 33 developed countries that have taxes similar to the GST, only 3 charge less than Australia.

The OECD average is just below 20 per cent, almost double what Australia is charging. Australia raises $56 billion from the GST. If it boosted the rate to 15 per cent it could raise $80 billion.

The department is also worried about the growing importance of spending on items not subject to the GST such as health and education and goods sold online. It says the proportion of sales covered by the GST has slipped from 56 to 47 per cent in the past 10 years.

The discussion paper is the first occasion on which the Treasury has been able to make public its views about the GST. The Rudd government prevented the department from considering the GST in preparing the Henry Tax Review.

In a sign the contents of the white paper will cause problems for the Abbott government, it has inserted a sentence into the discussion paper saying it will consider proposals to change the GST only if there is "broad political consensus for change, including agreement by all state and territory governments".

Treasurer Joe Hockey said the discussion paper marked "the start of a conversation about how we bring a tax system built before the 1950s into the new century".

He said globalisation and the rise of the digital economy had the potential to render Australia's heavy reliance on income taxes unsustainable.

The paper says among the OECD nations, only Denmark relies more heavily on income and company taxes than Australia. Left unchecked, the process known as bracket creep will push more Australians into higher tax brackets. Australians on average full-time earnings at present pay 22.7 per cent of their income in tax. By 2023, they would pay 27.4 per cent.

The treasury says Australia's company tax rate of 30 per cent is well above those of countries with whom it competes. One third of company tax is paid by just 12 companies. The department says if the rate was cut, half of the benefit would most likely accrue to employees of those companies who would benefit from greater investment, greater productivity and higher wages.

The paper calls into question the concession known as dividend imputation, which allows Australian shareholders to deduct from their personal tax company tax already paid by the companies that pay them dividends. It says the concession is not available to the foreign investors Australia needs to attract and asks whether it is "continuing to serve Australia well".

Rather than critiquing the practice known as negative gearing, which allows Australians to write off against their income tax losses made from rental properties, the Treasury calls into question the tax arrangements that makes it profitable. Since late 1999, capital gains tax has applied to only half of the profit made when each rental property is sold. The paper says it is this arrangement rather than negative gearing itself that is driving investment in rental properties.

It says Australia's taxation arrangements for savings are uneven with saving through bank deposits taxed highly, savings through property taxed at half the rate, savings through Australian shares taxed even less, saving through domestic housing taxed not at all and saving through superannuation tax advantaged. It raises the prospect of one standard rate of tax for all forms of saving, as suggested by the Henry Review.

The paper effectively rules out taxing the family home or the reintroduction of death duties. It confirms that by international standards Australia is lightly taxed.

The Treasury has asked for submissions by the end of May. It will produce a draft white paper in the second half of the year and a final white paper by December. Mr Hockey said the paper would feed into the policy preparation process for the  2016 election.

In The Age and Sydney Morning Herald

Tax white paper over-egged

The Coalition's version of the Henry Tax Review would have you think we pay far more in income tax than other countries and far more company tax. On income tax, it's over-egged the pudding.

Yes, income and company tax do make up a larger proportion of our measured tax take than other OECD nations, but that's partly because the 'tax take' of the others is boosted by including so-called social security contributions. These superannuation-like contributions typically account for one quarter and up to 40 per cent of total taxation in the countries that have them. We don't. We have super instead, which isn't counted in our tax base. Comparing like with like (which the Treasury doesn't do) our tax system probably isn't that much out of whack with everyone elses.

The Treasury's big contribution isn't to tell us we pay too little GST (that's been common knowledge for a while) it's to tell us that the tax concessions we offer for savings are a mess. The safest, bank deposits, get no concession, negatively geared property gets a lot and compulsory super gets even more. Labor put the whole thing up for discussion at a tax summit in 2011. It invited the Coalition, which didn't attend, labelling it a stunt.

Now, many of what were Labor's problems are its problems. It wants us to help it out. We should. While our tax system is nowhere near as bad as misleading international comparisons suggest, parts of it are a mess.

In The Age and Sydney Morning Herald

Read more >>