Think Tank: Aus Company Tax Cut No Silver Bullet

by Mary Swire, Tax-News.com, Hong Kong

01 March 2017

An "unfunded" company tax cut will not solve Australia's low rates of business investment, according to a new study by the Grattan Institute, a think tank.

The Institute said that Australia's economy could stagnate as the mining investment boom fades. It added that the country is experiencing its biggest ever five-year fall in mining investment as a proportion of GDP. Non-mining investment has fallen from 12 percent to nine percent of GDP, lower than at any point in the past 50 years.

According to the Institute, while the federal Government's plan to cut company tax from 30 percent to 25 percent over the next 10 years would succeed in attracting extra foreign investment over the long-term, it would come at a cost in the short-term.

The Institute estimates that gross national income (GNI) would be reduced by about 0.25 percent immediately after the tax is cut. It said that an "unfunded" tax cut would add to already large budget deficits. If the rate were cut to 25 percent from July 1, 2017, the deficit for 2017-18 would increase by about AUD7.4bn (USD5.7bn).

The Institute argued that any cut to the company tax rate should form part of a wider package of reforms that explicitly funds the cost to the budget. This should include an increase in the goods and services tax rate from 10 percent to 15 percent. The Institute estimates that this would generate around AUD11bn in additional revenue each year, even after compensation for lower-income households. It added that the tax treatment of capital gains, borrowing, and superannuation could also be adjusted.

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