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Sunday, February 12, 2017

Now Is Australia’s Last Chance to Become Tax-Competitive

Unless Australia slashes corporate tax rates, it may quickly fall behind in the global marketplace.

There is a growing appetite around the world for competitive tax systems. But right now in Australia, we are “pricing ourselves into oblivion.”

The last time business investments were falling this fast was during the early 1990s recession.

During last year’s election campaign, the corporate tax reform pushed by Prime Minister Malcolm Turnbull and Treasurer Scott Morrison promised to reduce business taxes from 30 percent to 25 percent over a ten-year period. This is not enough.

Too Little, Too Late

By the time these rates go into effect, Australia will have missed its chance to become an economically enticing nation to conduct business in a post-resource boom investment slump. As the Business Council wrote last year, “private business investment is currently very weak, having fallen substantially over the past three years.”

The last time business investments were falling this fast was during the early 1990s recession.

Currently, Australian companies give 30 percent of their earnings to the government. This is hopelessly uncompetitive in a global field that’s asserting lower taxes across the board – an average of 23 percent in Asia and 25 percent across the OECD.

As reported by The Australian, the Treasurer warned business leaders that:

“Australia is now facing the real risk of being globally stranded by crippling taxes that would erode the nation’s living standards if the government continues to be blocked politically from its company tax reforms.”

The opposition to reform of the corporate tax rate, even to this modest degree, shows how much harder the cause needs to be pushed. The election of Trump provides the perfect opportunity to do so.

The Time for Reform Is Now

The one area in which President Trump has not advocated for protectionism has been with international capital. If his “America First” trade policies are going to attract activity away from Australia and into the US, the first place to re-invite foreign investment and start increasing global competitiveness is to allow companies to keep more of what they earn.

Ever wonder why Facebook, a company with over 15,000 employees, is based in Ireland? You guessed it: the 12.5 percent tax rate.

Corporate income taxes are the most harmful when it comes to economic growth.

The Business Council explained how the biggest beneficiaries of lower business taxes would be employees, not ‘big business’, with the extra investment leading to more employment and higher wages.

Of course, maintaining Australia’s position among the five top-taxing OECD nations will not attract business, but will lead to fewer jobs and lower wages.

Lower Tax Rates, More Economic Growth

Rio Tinto global chief executive Jean-Sébastien Jacques said that if we remain stuck at 30 percent, “this will come at a cost in investment and jobs, as other nations leave Australia further and further behind.”

“Australia needs to prepare for the possibility that within a very short space of time the US could once again be a very attractive place to invest.”

Unsurprisingly, the OECD has found that corporate income taxes are the most harmful when it comes to economic growth. And just 17,000 of our biggest companies out of a total of 804,000 – around 2.1 percent – pay over half the tax.

Trump wants to reduce the American corporate rate from 35 percent to 15 percent. As the IPA wrote last year, “Australia needs to prepare for the possibility that within a very short space of time the US could once again be a very attractive place to invest.”

A 20 percent reduction in corporate taxation will unquestionably lead to higher investment. This hasn’t been much of an issue for Australia before – our tax was lower. But now this won’t be the case.

So let’s assume everything goes to plan.

In 2027, we’ll have a 25 percent tax rate; Singapore will have 17.5 percent, Hong Kong 16.5 percent, and both the USA and Canada will boast a wonderful 15 percent (not to mention Switzerland at around just 8 percent). Add to the mix Britain, which plans to further reduce taxes to 17 percent by 2020, meaning Australia must do its best to counter a “vicious cycle of stagnating growth and eroding living standards”.

Taxing 25 percent will still amount to a quarter of all earnings. It’s too greedy. What possible incentive could there be to invest in a place that takes more of your money?

Wesfarmers CEO Richard Goyder, who heads the country’s biggest private employer through Coles, Target, Kmart, Bunnings, Officeworks, and more, has revealed the company was considering investing almost $2 billion in England because of its lower tax and regulation environment.

For a company that employs over 220,000 people, that $2 billion means more jobs – just not in Australia.

The UK’s tax cuts began under David Cameron in 2010 in the aftermath of the financial crisis, when the country sulked in a deficit of 10 percent of GDP. They slashed corporate tax from 28 percent to 19 percent, leading to “steady and sustained recovery in business investment in the UK” with an increase of 25 percent up to March 2016.

Foreign investment into Australia fell from $US40 billion to $US22 billion last year – a 45 percent drop – representing its lowest level since 2003. Australia is now ranked 17th as a destination for overseas investment, down from sixth just three years ago.

Morrison said:

“Some have argued Australia can’t afford the cuts. The UK government, in a far weaker and more vulnerable fiscal position than Australia, took the view they could not afford not to.”

When applied to Australia, the British model predicts that a 25 percent rate would result in a permanent increase in business investment of 2.9 percent, amounting to $6.5 billion. Think of the potential if we cut it to 20 percent, as the Liberal Democrats propose.

So if we reflect on the future tax policies of our competing nations, Australia’s initial $48 billion plan to see a reduction to 27.5 percent for businesses with turnovers of less than $10 million is not up to scratch. Corporate (and personal) income taxes should be heavily reduced and streamlined across the board.

I’d like to know what Labor and the Greens think will happen when we have a corporate tax rate of double our most important competitors.

Will they be surprised when Wesfarmers takes thousands of jobs elsewhere and hold the government accountable when unemployment increases?

Australian policymakers should prepare for the US becoming a far more competitive powerhouse and those in opposition should consider their opinions responsibly. The predictable media view that Trump will ruin domestic and global economies will probably be as wrong as the expectations about his inevitable election loss.

If the Australian parliament doesn’t get its act together we’ll be stuck in years of economic decline and inactivity. We’ll be kicking “the greatest own goal in history.”

This will “in turn add fuel to a populist uprising we just witnessed in the election of Trump.”

  • James was an intern working with FEE through the winter. Back home in Australia he's affiliated with the Mannkal Economic Education Foundation, a free-market think tank which sponsors students each year to work with like-minded organisations to pursue ideas of liberty, personal responsiblity and small government. He hopes to gain the experience he needs from FEE to pursue his career in fostering libertarian public policy throughout Australia.