Nations prosper best with a competitive tax structure
20 August 2018
This opinion article by Jennifer Westacott was published in The Australian on 20 August 2018.
There has never been a more critical juncture than right now to remind our politicians to be careful what they wish for.
After all, those in Canberra intent on wishing away a reduction in the company tax rate, despite overwhelming economic evidence of its benefits and concerted action to lower company tax rates in other countries, must eventually answer for their vote.
If the government’s push to reduce the company tax rate by five percentage points across a decade fails to pass the Senate, those who opposed the measure will have to explain why they deliberately chose to weigh down our country and our workers with uncompetitive lead in the nation’s saddlebags.
They’ll need to own their decision to cement a complex and unworkable two-tiered company tax system that serves as an artificial handbrake on the ambitions of an army of small businesses that want to expand.
If our politicians squib the chance this week to extend the small business tax cut to all companies, they will be voting to impose a huge tax cliff on small businesses.
And here’s why.
At the moment we have a two-tiered tax system where companies with a turnover of less than $50 million pay 27.5 per cent tax while everyone else pays a 30 per cent company tax rate.
If a small company’s turnover increases by just one dollar to reach the $50m turnover “cliff”, it immediately will be liable for an additional $125,000 in company tax if its profit is 10 per cent of its turnover.
Yes, that’s a hit of an additional $125,000 in tax for just one more dollar’s revenue. This is because it will pay the 30 per cent company tax rate on every dollar of profit it makes.
There’s no way around it: retaining a two-tiered tax system is quite simply a slug on the Australian spirit of entrepreneurialism and our innate desire to compete, grow and be successful. It sends an unambiguous message: don’t invest, don’t sell more, don’t employ more people and, whatever you do, don’t increase your turnover above $50m a year.
There are about 2500 businesses with a turnover of between $50m and $100m, employing 470,000 people.
Many of our most iconic companies have grown from humble beginnings. Companies such as Coopers Brewery, Thomas Foods International and Bega Cheese will completely miss out on a tax cut.
Ultimately it is Australian workers who pay the price.
Our workers will be employed by Australian companies that cannot hold their own against the rest of the world.
The US decision to slash the federal company tax rate from 35 per cent to 21 per cent has contributed to an influx of new investment.
OECD analysis shows lower company taxes have led to stronger growth.
So it’s not surprising that in the US business investment is growing, the unemployment rate is low and falling, and wages growth is rising.
Boral is making the biggest US acquisition by an Australian company in years, paying $US2.6 billion ($3.6bn) for building products group Headwaters.
Visy has pledged to invest $US2bn to create 5000 US manufacturing jobs.
Australian companies tell me that not acting on Australia’s uncompetitive company tax rate means the chances of big projects going ahead in Australia or the chances their operations will stay here are ever-diminishing.
If we let our competitiveness slip away by refusing to budge on having one of the world’s highest company tax rates, it signals we have given up on productivity and competitiveness.
The growth in Australian productivity remains low. Productivity improvements drive wages growth and allow us to compete.
Investment is a key ingredient in lifting productivity but right now it is low as a share of the economy and productivity growth remains lacklustre. It is why we desperately need to lower the company tax rate.
If we do nothing to shore up the competitiveness of our economy, we’re throwing away control over our own destiny. We will be at the mercy of external economic forces.
“Hospitals, or tax cuts for big business” makes a catchy slogan but it offers a phony choice. Only economic growth can give us the capacity to sustain our world-class healthcare system.
Successful and profitable businesses drive income growth, which fuels government revenue.
Even with company tax cuts, businesses will contribute more than $100bn in revenue by 2021-22 — about $30bn more than this year. Across the next decade, businesses will pay a cumulative $1 trillion in company tax. And business pays the wages that will contribute to the collection of almost $270bn in personal income tax in 2021-22.
This is the revenue base that underpins our health, hospital and other services and gives government the capacity to invest in the projects that really matter.
If the Senate votes no to a competitive company tax rate, it’s no for the foreseeable future.
And by the time we wake up to the need to act, we’ll be so far behind it will be impossible to catch up.
We need to ask our elected representatives whether they are in public life to advance the interests of the country or to score political points.
All Australians, I believe, want our politicians to advance the cause of the nation.
We need a plan to make our country more competitive; a plan to lock in the jobs of the future; and a plan to grow the economy, drive wages growth and investment.
Jennifer Westacott is chief executive of the Business Council of Australia.