Budget Forum 2016: The Connection Between Company Tax and Living Standards
18 May 2016, by Janine Dixon and Jason Nassios

Can we use company tax policy to enhance Australian living standards?

The Treasurer thinks so, using the 2016-17 budget to announce a Ten Year Enterprise Tax Plan, essentially cuts to the company tax rate which will be phased in over the next decade.

The premise put forward by Treasury and its advisors that a cut to company tax will attract capital, leading to growth in GDP and wages, is uncontroversial. In itself, this is not a justification for cutting company tax. To correctly assess the impact of the policy on the Australian people, we need to understand its impact on gross national income (GNI). While Treasury finds that GNI will also increase, the case for this is less certain.

Unsurprisingly, economists frame the question of choosing the appropriate rate of company tax as an optimisation problem. We could have a low company tax rate, attract lots of capital from foreign investors, and collect little revenue through the tax system; or we could have a high company tax rate, attract less capital, but collect lots of revenue on what we have. This optimisation problem can be stated as “Choose X, the cut to the rate of company tax, to maximise ΔI, the change in gross national income.”

For this problem, our starting point is the status quo; where the company tax rate is 30 per cent, and foreign ownership of capital is estimated to be 20 per cent. From this starting point, there are both gains and losses to GNI from a cut to company tax.

Losses from a cut to the company tax rate stem from a fall in taxation revenue, principally the revenue collected on the 20 per cent of capital that is foreign owned, and willingly installed under the present tax regime. This loss of revenue collected from non-residents is a loss to gross national income. Importantly, any taxation revenue lost on domestically owned capital is a gain to the domestic owners of capital, so it remains under the umbrella of national income.

As a nation, we gain income when foreign investors respond positively to the increase in their post-tax rate of return on investment in Australia. For every additional dollar earned by foreign investors, the nation receives a proportion, equivalent to the new (reduced) rate of company tax.

Read the full article at Austaxpolicy Blog.