Company taxes should be the first target of any push to boost economic growth through tax cuts, a paper out today from CEDA states.

The paper, by sometime Crikey contributor Nick Gruen, finds company tax cuts will drive growth more effectively than personal income tax cuts. It points to the experience of countries such as Ireland, whose very low rates of company tax appear to have played a key role in its remarkable economic growth since 1987.

Gruen writes in the Fin today that cutting the top personal tax rate focuses tax reform where it gives the least growth dividend – and that aligning personal and business tax rates “keeps our eyes off a bigger prize”:

Economic theory suggests lowering company tax generates more growth than lowering personal tax. So does a bit of empiricism – whether it’s from casual observation or a careful look through the trusty econometriscope.

Economic theory says taxes on investment returns discourage saving and investing and that this effect compounds hugely over time, depressing productivity, wages and growth.

That is why a plausible economic model suggests that cutting company tax eventually generates more than twice as much growth as personal tax cuts, returning nearly 50% of its revenue cost back to government as increased growth swells tax receipts.

And that’s before you count the way company tax cuts would increase foreign investment.

The CEDA report finds that Australia could fund substantial company tax cuts by abolishing its system of dividend imputation – the system that currently delivers “tax credits” to shareholders where a company has already paid tax on its profits. CEDA says abolishing dividend imputation could fund a company tax rate of as low as 19%, making a major contribution to economic growth without requiring spending cuts or tax increases elsewhere in the economy.

A certain PJ Keating, the bloke who gave us dividend imputation, is having nothing of the idea. Stay tuned for plenty of the debate on this new front in the battle for some genuine tax reform.

Peter Fray

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