Who benefits from a lower corporate income tax rate? 21 September 2016, by John Freebairn

Corporate income tax in Australia in 2014-15 collected $67.7 billion, or 15.2 per cent of all tax revenue and 4.2 per cent of gross domestic product. The 2016 budget proposed to lower the corporate income tax rate from the current 30 per cent, initially for small business and ultimately to a 25 per cent rate for all corporations by 2026-27. An important question is who will benefit from a lower corporate tax rate?

In the first instance corporations write a tax cheque to the government. In reality companies pass this tax to individuals either as lower after-tax shareholder returns, lower market wages, or higher product prices. There is a general consensus for minimal changes in product prices. The split of the tax between higher returns for resident shareholders, non-resident shareholders and employees, and the net loss of government revenue, are a matter of debate and empirical uncertainty. Key parameters affecting the distribution of the benefits include the time interval, the mix of equity returns to internationally mobile investment options versus geographic immobile options, the response of international capital inflow to higher after-tax investment returns in Australia, and the response of business investment to a lower required before-tax rate of return. There is legitimate debate about, and different estimates of, these parameters.

Corporate Income Tax

The corporate income tax base is a measure of income earned on shareholder equity investments. It is the residual of product sales less outlays on labour, materials, depreciation of capital, debt interest and other taxes, including state taxes and royalties. The return on shareholder funds includes: a normal return to compensate for saving rather than current consumption and for risk taking; economic rent on geographic immobile natural resources and domestic markets, monopoly power, and government provided services and infrastructure; and, quasi-rent on firm specific and likely long term internationally mobile technology and management skills.

Australia is a net importer of funds from a much larger international capital market, and with limited restrictions on the inflow of non-resident funds. Non-resident shareholders are an important share of equity investors in Australian companies, at least 20 per cent and as much as a half. To a large degree, non-residents search the world for higher after-tax returns. If investment returns improve in Australia, either because of new attractive projects such as a mining boom, or a reduction in Australian taxation of those returns, non-residents will allocate a larger share of their funds to Australia.

Read the full article at Austaxpolicy blog.