Labor has long recognised the importance of trade and investment as essential components for growing Australia’s economy and we support broadly the final report on the committee’s inquiry.
However, the Labor members do not support recommendation 2 which calls for a reduction in the company tax rate to be a priority. The recommendation is based more on ideology than any sound economic basis and the committee did not find any compelling evidence that reducing the corporate tax rate would result in an investment boom or higher wages. This is dealt with in more detail below.
The Labor members would also like to note, that while this inquiry was coming to a close when the COVID-19 pandemic hit, it has highlighted the absolute need for the Australian government to focus on diversifying Australian export markets and supply chains as vital for the economy, for jobs, and the prosperity of all Australians.
Recommendation 2
2.102 The Committee recommends that the Australian Government continue to progress its tax reform agenda, particularly by reducing the company tax rate, as a priority.
Labor members do not endorse Recommendation 2 of the JSCTIG’s Supporting Australia's Exports and Attracting Investment Report, which calls for a reduction in the company tax rate to be a priority.
The hearings undertaken and submissions received by the inquiry preceding the Government’s report did not make the case for an urgent reduction in the rate of corporate tax in Australia.
No compelling evidence was provided to the Committee that a reduction in the corporate tax rate would result in increased investment into Australia or any benefits for working Australians through higher wages or conditions.
Australia already has low levels of average and effective corporate taxation.
While statutory corporate tax rates are the most obvious measure of corporate taxation, they are often misleading. In many countries, seemingly low statutory rates are offset by a broader definition of taxable income that results in an effective corporate tax rate far higher than the statutory level would imply.
Conversely, Australia’s statutory corporate tax rate, currently 30 per cent, is offset by a range of concessions, allowances and rebates that translate into significantly lower effective and average rates of taxation for companies operating in Australia.
A recent assessment of corporate tax rates across the G20, undertaken by the US Congressional Budget Office, found that Australia’s top statutory corporate tax rate is close to the median, rather than an outlier disincentivising investment in our economy.
This authoritative analysis also found that Australia’s average corporate tax rate is far lower than the statutory rate, as is the effective corporate tax rate paid by Australian companies.
For any company considering foreign expansion and investment, comparing effective tax rates is the best way to assess real levels of corporate tax in destination markets and their impact on investment returns.
Therefore, Australia’s low average and effective corporate tax rate are important dimensions in our attractiveness as a market for overseas investment and in total flows of foreign investment.
While tax is an important factor in corporations’ investment decisions, the OECD has found that it is not the main determinant. Capital flows are attracted to countries which offer equitable and efficient access to markets, stable conditions and profit opportunities, low levels of sovereign risk and a predictable, non-discriminatory legal and regulatory framework.
Not only does Australia already have highly competitive rates of average and effective corporate tax compared to our G20 peers, these are matched by our rule of law, well-developed infrastructure, strong institutions and public services, advanced levels of human capital and a raft of other fundamental attributes that are highly attractive to businesses – including those based in jurisdictions with lower corporate tax rates than Australia.
Given that the decision-making of foreign investors is most strongly swayed by these macroeconomic fundamentals, it is not clear that slashing statutory corporate tax rates is required to attract foreign capital.
The Committee did not find compelling evidence that reducing the corporate tax rate would result in an investment boom or higher wages.
The economics underpinning proposals to reduce the statutory tax rate applied to the largest businesses operating in Australia are not compelling.
Reducing Australia’s corporate tax rate for large businesses will not unleash higher levels of investment or a job-creation boom. Instead, it is more likely to accentuate the share of economic output flowing towards shareholders and capital at the expense of labour.
Since the 1970s, Australia’s corporate tax rate has fallen from nearly 50 per cent to 30 per cent. This contributed to corporate profits reaching all-time highs at the end of 2019, with the windfall being directed towards shareholders, rather than being reinvested back into productive assets and deepening the capital base of the Australian economy – ultimately, the key driver of improved living standards.
Across a similar period, labour compensation as a share of GDP fell from 58 per cent in the mid-1970s to just 47 per cent by 2017, the lowest level since 1960.
Rather than enabling capital deepening, as promised by advocates of accelerated corporate tax cuts, falling corporate tax rates and rising company profits have been accompanied by capital shallowing – a reduction in the capital-labour ratio that has contributed to Australia’s declining labour productivity.
Labour’s declining share of Australian GDP has equated to the redirection of over $200 billion in income per year from Australian workers to other groups in society, mainly corporations. Prioritising further corporate tax cuts in the name of obtaining higher levels of foreign investment would accelerate this trend and give precedence to the bottom line of large corporations over Australian living standards.
The idea that lower-taxed firms create more jobs is also not supported by evidence. An examination of the relationship between Australian companies’ job creation rates and tax rates demonstrates that output and employment growth in the Australian economy has not been driven by those with the lower effective tax rates.
In fact, firms which use existing deductions and rebates to obtain an effective corporate tax rate lower than 25 per cent shed more jobs than they create. By contrast, Australian firms with an effective tax rate above 20 per cent grew employment at an annual rate of 2 per cent.
Australia’s weak budget position
Australian Government debt more than doubled during the period 2013 - 2019. Even before the COVID-19 response, net debt stood at over $403bn, an all-time high.
The Government’s response to COVID-19 will result in an unprecedented and rapid additional increase in public debt.
This is not the time to slash the company tax rate, with large corporations being given a free kick at the expense of working Australians.
To slash the company tax rate at this time would result in workers on average incomes bearing an even greater share of the burden of paying off this Government’s massive debt.
Ms Ged Kearney MP
Deputy Chair
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