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Lowering company tax may be harder than we expect

By Jacob Saulwick | smh.com.au | 24 August
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I asked one of them if Australia needed to lower its corporate tax rate to remain competitive internationally.

“I think that argument is well and truly over-sold,” came the answer, from Fraser. “Everyone says you have to be able to compete with Singapore and Hong Kong and so on. I think there's a lot of nonsense in that.

“People make capital decisions on all sorts of considerations, of which tax is one. If you were Singapore or Hong Kong and you did not have resources or land, obviously tax concessions are one of the few instruments you have.

“But if you are a country like Australia, you have resources of all sorts and lots of skills and so on, I think that tax is less a consideration. And in any event the tax benefit that you might get from some of these concessions that some countries make can be offset by exchange rate changes.”

Fraser, now a part-time horse trainer, was talking from the stalls of Thoroughbred Park in Canberra, while brushing down the first of his two runners for the day. Fraser remains a man of deep energy.

His friends at the races who help him with the 20-odd horses he breeds and runs marvel at his ability to stay up all night reading papers. He is always flying off to Melbourne, to keep up his involvement with industry super funds and as the chairman of Members Equity Bank.

For Fraser, the review led by Henry into the make-up of Australia's tax arrangements is a brilliant opportunity to wrestle with, above all, the fairness of the system.

“You start with income tax ... The income tax system is a long way from being fair,” he says. What is wrong with it? All income, Fraser says, should be treated the same way, whether it comes from shares, property or paid work.

“I think it is very disadvantageous to ordinary people that capital gains are treated so generously. It's income. It should be treated as income in my view.

“If someone earns $100,000 on a capital gains transaction, and someone earns $100,000 from going to work every day, I think they should be taxed at the same rate,” he says. “The second big test for me about a fair income tax is to have a progressive system.

So the more income you earn the more tax you pay. “The only progressive element left in our tax system is income tax, and it has become a less and less significant component to total taxes.

Howard, every second budget, was reducing income tax rates, mainly at the higher rate. “And what's happened is we've got regressive GST taxes that now raise a greater proportion of revenue.

So the whole system has reduced the one progressive element in the system and replaced it by a regressive system.”

Is he confident the review will make the tax system fairer? “I live in hope. Politicians will say it's not real life. I think if they say that they are lacking in courage.”

Henry also talks about making the tax system fairer. But the present Treasury secretary has, nevertheless, been preparing the ground for some decisions likely to be unpopular.

On Friday he gave the strongest signal yet that the review would recommend lowering the company tax rate from 30 per cent.

“The panel does need to seriously consider the merits of a reduction in the company tax rate,” Henry told the Australia New Zealand Leadership Forum in Sydney. “After all, Australia has moved from having the ninth-lowest company tax rate in the [Organisation for Economic Co-operation and Development] in 2001 to having the 22nd-lowest today.”

To justify lowering corporate taxes, Henry has made the argument that the burden of higher company taxes ultimately falls on workers. One of the central tenets of tax policy is to minimise its drag on economic activity.

So when you increase taxes on labour you run the risk that – at least in theory – workers in a globalised world will up and move overseas. But is that really likely to happen?

Henry cited figures showing fewer than 4 per cent of skilled Australians worked overseas. And, presumably, most people who move overseas have something in mind other than dodging tax.

On the other hand, if business taxes are too high, globally mobile capital will be inclined to invest elsewhere. And if it does invest in Australia, it will demand higher productivity – more work for lower wages – from labour to compensate for the increased taxes.

Thus, the argument runs, the cost of higher company taxes is paid by labour.

(To be sure, the issues the Henry review is analysing around company tax are more complex than simply lifting or cutting the rate. The review is also considering different models of company tax, such as an expenditure tax. In this system, companies are not taxed on income or profits but on what they spend locally.

The advantage of this system is that it gives companies no incentive to transfer profits overseas to avoid tax. One disadvantage is that few countries in the world use the model, so it has not really been tested.)

But whatever the Henry review, due to report by the end of the year, finally says about company tax, it is certain to be controversial.

And if a former treasury secretary and Reserve Bank governor remains unconvinced about the need for business tax reform, the Government may have a hard time convincing the electorate.


Ross Gittins is on leave.

First published by Smh.com.au on August 24 2009
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