Tuesday, March 11, 2014

Should we maintain the company tax rate at 30%?

In its pre-budget submission, the Tax Institute stated:
A cut in Australia’s company tax rate will deliver economy-wide benefits that are necessarily in the national interest. 
As a result, The Tax Institute supports reducing the company tax rate in the medium term from its current 30% to the 25% recommended by the Henry Review. In addition to increasing 
Australia’s attractiveness as a destination for foreign investment, a 25% rate is comparable to
rates in similar sized OECD countries. A 28% rate would be a step in the right direction and
Australians across the board will stand to share in these benefits.
A wealth of reliable evidence indicates that the incidence of company tax falls on employees. 
This means that reducing the burden of company tax is expected to result in companies passing on the benefits to their employees either in the form of increased wages or additional
recruitment – increasing productivity and employment.
A company tax cut would also reduce taxes on investment, driving an increase in savings and 
capital as well as innovation and entrepreneurship – all outcomes that are indisputably in the
interests of all Australians. Such a cut would also reduce the incentive for profit shifting out of
Australia, allowing us to retain a greater share of the profits generated here in Australia
This is bad special pleading, especially bad in a globalising environment. Just how does the burden of company tax fall on employees? Further, why should a fall in the benefits of the tax rate for specific companies be passed onto employees by that company?

The traditional argument runs that lower company tax rates increase the incentive to invest by increasing the net return on investment, thus encouraging more investment and more environment. That may or may not be true.  I am not sure that it is when company tax rates are relatively low and when the scope for tax shifting is substantial.

Profits will still be shifted, while companies may pay more in dividends. Not that the last is necessarily a bad thing. Further, within companies the increased pot is likely to go those with the most bargaining power, and that's not the ordinary employee.

Governments need funds to pay for services and investment, to maintain the structure on which profits depend. It is clear that Australia is under investing, especially in key infrastructure. Now Governments don't, it seems, have enough money to do minimum things. And yet, we want to cut taxes further.

When company tax rates were 40% plus, the argument for lower tax rates was highly persuasive. But a shift from 30% to 25%? Where do you draw the line? Are we saying that economic benefits will be maximised at a company tax rate of zero? If not, what is the optimum company tax rate?

I think that Australians would be more sympathetic to the arguments about lower company taxes if the could see the benefit to them. They don't, and for understandable reasons. They just don't seem to benefit.

Maybe its time to ask why not freeze the company tax rate at its current level? If the extra money raised was used to fund infrastructure, then we might all be better off.  


Anonymous said...

"Company tax" is paid on "company profits". The CEO of Apple Inc. was too convulsed with laughter to offer an opinion.

I'd be delighted to drop the company tax rate to zero, and also zero personal taxes - so long as they were replaced by a transaction tax with no exceptions and no exclusions.

"Regressive!" - I hear you say; "Good!" I'd reply.


Jim Belshaw said...

There is a teensy, weensy little problem with that, kvd. It means that the only tax revenue obtained is, for example, from the Australian expenditure of BHP, its employees, contractors and suppliers. It would place BHP in the same position as Apple. I haven't done the maths, but I suspect that we would need a consumption tax of perhaps 40% to compensate. Then watch the tax shifting!

Anonymous said...

Without getting too bogged down in actual rates Jim, the figures I have read suggest that your decimal point needs to be left-shifted to make it maybe 0.4% - not 40%

One large area of 'avoidance' seems to be cash-based transactions, which I think could be somewhat covered by printing a "use by" date on all large denomination currency - thus forcing its timely re-entry into the normal banking system, where it would be subject to a transaction tax.

(Aside: I think a termination date on currency would be quite attractive whatever tax system you support)

All I am saying is that there are other ways of providing necessary revenues for necessary government purposes, and that this is a credible alternative.


Evan said...

"A cut in Australia’s company tax rate will deliver economy-wide benefits that are necessarily in the national interest."

That word 'necessarily' bothers me - it seems to mean something like, "What is good for GM is good for America (Australia in this case)."

The whole piece seems to be a list of assertions some of which are probably demonstrably wrong and almost of which need to be debated.

What can be done about companies shipping their profits to low tax jurisdictions I don't know. I'd like to hear people's views on a Tobin Tax or similar.

Jim Belshaw said...

Hi kvd. As I remember the stats, there aren't actually a lot of the highest denomination note around.

I agree that there are various tax alternatives. But to help me understand, what will your 0.4% apply too? Are we talking of, to use Evan's example, a Tobin tax? This is not a trick question, by the way. I am seeking to understand.

Anonymous said...

Pretty pictures:


Jim Belshaw said...

Thank, you anon. Pretty picture indeed. Oddly, Oz did have such a tax or taxes. One was the bank account debits tax, the second the financial institutions duty.

My first problem is that I cannot see just how such a general tax might work in practice. How would it be collected on retail sales, for example. My second problem is to properly understand the dynamic aspects.

Anonymous said...

Hi Jim

By 'higher denomination notes' I was actually thinking of $20 and above - but now you query it, one in all in, so make all paper money have a short shelf life - say 3 months - before it 'expires'. (Until cash disappears completely within a few years as I expect it will)

On the 'what am I talking about' I was not thinking of a Tobin Tax as I understand that is quite restricted in its proposed coverage, and was more targeted at high volume share trading, exchange rate volatility and the like? That is just one aspect of transactions.

More, I was thinking of a blanket low rate tax on all transactions levied (collected I should say) at the financial institution level - on your, mine and everyones' every transaction.


Jim Belshaw said...

Leaving aside the terminating bank note problem and just taking a simple transaction. I pay rent via electronic transfer. Presumably, I would pay the tax on the transfer, the real estate agent would pay it on receipt, the owner would pay it when the funds were transferred to him, since each is a separate transaction. My mind begins to hurt.

I spend $100 on goods and pay GST of $9. That's the final tax take since the input tax credits are refunded along the chain. Leaving aside income tax paid on the money I spend, I wonder what the transaction tax % would need to be along the chain to collect $9, recognising the value add at each step. Well above 0.4% I would have thought.

Anonymous said...

Anon, those pictures are pretty, but they fail to explain (anywhere I looked on the website) just how the total tax take is at least equalled after you get rid of all the other taxes? Maybe it's too hard.

I had a look at BHP 2013 statement of cashflows, and I'm probably wildly wrong because it contains a lot of net-offs, but it seems 'cash' in/outs totals somewhere north of 200Bn while their tax expense was 6.7Bn. That means that (very roughly) you would need to replace the tax expense with a transaction tax of 3.5% - which is much higher than my earlier mentioned 0.4%

And all you would thereby achieve is stasis, when what is required is either greatly reduced government expenditure or significantly increased tax collections - just as Mr Henry pointed out last night. (I have a lot of time for him; he seems a very practical sort of person)


Jim Belshaw said...

Thanks, kvd. That comment captures my problem quite well!

Anonymous said...

Sorry Jim - out posts crossed in the nether.

The answer to your query re the $100 with $9 tax take would have to be that you assume something like three sets of hands through which the goods pass before you get them. That would make each party liable for 1/3rd of the $9 - or half of that again, if you taxed both the payment and the receipt.

Given that each has 'saved' the GST on the way through, then to maintain 'stasis' you'd get back to either 3% on each receipt, or 1.5% on each receipt and payment - no?


Jim Belshaw said...

you are making my head ache, kvd! To keep things very simple, and ignoring gst exemptions, say the product is carrots.

Under the current system, the farmer collects the GST sales to Coles. From this, he deducts the GST paid to his suppliers, and pays the Government the balance. Coles then collects the GST from me, deducts the GST paid by the farmer and gives the amount to the Government. The cost to me is 10% of the value added across the chain.

Putting this another way, the two legs in the production chain give the Government 9% on their value added. This equates to the amount of tax I pay.

Now in the new system, nobody pays GST. Instead, the farmer is charged for the payments he makes to suppliers plus on the receipts from Coles. Coles is charged on the payments to the farmer plus my payment to Coles. I am charged on my payment to Coles.

In the current system, I actually pay the tax, the suppliers collect it. In the new system, they pay more, I pay less. I'm confused!

Anonymous said...

I f*ing hate carrots. To my certain knowledge I am the only person extant who actually knows how to make them edible: julienned, lightly fried in butter with pepper, served with wasabi and avocado to dip; plus iced water on the side. So, it's no wonder you are confused, if you can't even convert carrots to edible status.

To return to your farmer (who we must all ignore has paid his little contribution on his land, his plant, his inputs, his wages, his own sustenance, etc. and therefore built them into the price he charges Woolies; or am I getting away from your 'assume a level playing field scenario'?)

Nevertheless, I would first ask a couple of questions:

1) why should I ignore the tx-tax you paid on your earnings in order to be put in funds to purchase carrots?
2) why should I also ignore the tx-tax paid by your client when they paid you?
3) why do we disregard the costs associated with your car or your public transport in order to meet with the carrot vendor, or your client?
4) or the electricity, avocados, pepper, butter, and not to forget wasabi, to make them edible? And also the stove, the house, the plates, knives and even the water?

Ask me about pumpkins. I do a good pumpkin, even if I do say so myself. And pumpkin will be tx-tax free under my system; the only exempt good or service, capital or revenue :)


Anonymous said...

Now that I have that out of my system, can I propose some basic factors which remain, whatever approach is chosen?

1) governments need more money because the citizens are not willing to forego the level of government services presently enjoyed (and promised) to any significant extent.

2) the cash economy (including black and online) does not contribute its fair share under existing processes.

3) GST (rate and coverage) appears to be an area which might provide increased revenue at most transparent individual cost and least administrative upheaval.

If the above 3 are reasonable, then I would favour an increase to the GST rate, and an attack on the cash economy before I would look to comany tax rates.

But I accept that it is not an either/or situation so maybe company tax rates might also be tweaked; the worry being that this can have cross-border effects over which we have little control.


Jim Belshaw said...

I would agree with all those points, kvd. One of the difficulty with the GST rate is that people find it easier to adjust to a series of small changes than one hit.