As expected, the proposals from the business tax working group to lower the company tax rate in Australia from 30% to 25% has produced the usual chorus of selfishness and magic puddingness from business groups.
The discussion paper released yesterday suggests that cutting corporate tax to 25% over four years would cost about $26 billion, but financing that by reducing or eliminating several business tax breaks would save at best $10 billion. Two significant taxes or concessions were outside the committee’s remit, the GST and dividend imputation.
But from the reaction to the discussion paper from business groups, as reported this morning in their two main newsletters The Australian Financial Review and The Australian, the proposals won’t fly because business doesn’t want to give up any of their corporate welfare and want others to pay the cost of their tax cuts (such as increasing the GST, despite it being outside the inquiry).
So we got ”business furious at plan to axe tax breaks” from The Australian (must have been a bad night after the paper’s editor-in-chief, Chris Mitchell, yesterday reneged on the no retrenchments line and announced plans to call for 20 volunteers). That headline and much of the story was just wrong. There’s no plan to “axe” anything. It is a discussion paper that calls for responses from business and others (and responses that have to be far more considered than what we saw yesterday from the likes of the Australian Industry Group, the property lobby, the Minerals Council and the Business Council. While The AFR reported these moans, it was slightly less hysterical than The Oz, pointing out the idea was “dead on arrival”. It also ignored the point that it was a discussion paper, so the process hadn’t left the station.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
Business though didn’t like the idea of being forced, by the terms of reference for the inquiry, to provide ideas to make the tax cut self-funding: that is, business has to give up lurks and perks to get a bigger reduction in the company tax rate. That’s the source of much of the angst. Have you ever met a business lobby that will willingly give up a perk in the name of the greater national good? There seems to be an idea in business (similar to that in wide sections of the trade union movement and among many in the social welfare lobby) that there is a huge magic pudding containing all the money needed to meet everyone’s needs and demands.
Reform is always about change involving winners and losers. Business wants to be winners, and ignores the costs of its changes that are paid by others in the community. Complicating matters was the political decision by Wayne Swan to leave the GST and dividend imputation out of the inquiry. Superannuation (and the huge advantages that accrue to superannuants, especially wealthy ones) only gets a passing reference. But it is clear from the working paper that the impact of the tax cuts and possible changes to pay for them, will have a dramatic impact on the $1.3 trillion super industry.
In fact it is clear from the paper that not much is known about the way the super industry (which is Australia’s most valuable pool of savings) intersects with business taxes in their various forms. You could ask does the size of the super industry inhabit the reform process by basically being the biggest single collection of potentials losers (and possibly winners) from any change?
It was a strange (again, political) decision of Swan to leave dividend imputation out of the inquiry, even though, as the working paper says, it is outside the business taxation regime. From what is explained in the working paper, the superannuation industry will be impacted by anything other than a minor fiddle at the margins of business taxation. For example, dividend imputations helps super managers to cut their tax, some to close to zero. Get rid of that and they pay more, but returns to clients would be cut.
But a few years ago economist Nick Gruen wrote in Crikey that abolishing dividend imputation could fund the cut in the company tax rate from 30% to about 19%. He said in 2008 that imputation cost (then) $20 billion, “doesn’t lower the cost of capital to our firms and so it’s a simple ‘windfall’ transfer to domestic shareholders”.
Business ignored this and other arguments that might have started a decent discussion and the need for a broader inquiry, and stuck to the messages of “no” and “moan loudly”. They ignored the overriding principle of the inquiry, which was explained in yesterday’s paper:
“A broader corporate tax base could enhance the quality of investment within Australia by minimising the extent to which business decisions are distorted by the different tax treatment of investments or activities. A broad tax base is associated with minimal tax deductions and concessions, and would ideally involve taxing all forms of income associated with business activity consistently.”
And then there was this major point conveniently ignored in the glib moaning from the various parts of the lobby:
“It is inevitable that a company tax rate cut funded through measures that broaden the corporate tax base will generally involve a redistribution from those who benefit from existing concessions to the broader corporate taxpaying base, at least in the short term. It is often easier to identify those who stand to lose from base broadening measures, compared to those who stand to gain (perhaps marginally) by a lower corporate tax rate.”
In other words, in the end business doesn’t pay, others do — customers, labour and the community generally. As the authors of the report noted.
The terms of reference of the working party were not broad enough for a meaningful inquiry and recommendations. It could still have been widened, without including the GST.