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Pssst! Malcolm. Steal Labor's tax policies and slash company tax
Posted on February 19, 2016 by Ken Parish
I don't understand why Prime Minister Turnbull and Treasurer ScoMo are busily demonising Labor's entirely sensible announced policies in relation to negative gearing and Capital Gains Tax for residential rental properties. I can only assume that the politician's instinct to condemn just about everything an opponent proposes has proven irresistible.
They probably also imagine an effective scare campaign to convince suburban mums and dads that Bill Shorten is attacking the value of the family home. That might well work to an extent, but it would be a pyrrhic victory. As things currently stand, abandoning their plans to jack up the GST to pay for income tax cuts has left the Coalition without any tax policies at all, and just as importantly without any deficit reduction policy either.
If they could only resist that kneejerk impulse to attack an opponent's policies at every opportunity, surely Turnbull and Morrison would recognise an opportunity to use announced Opposition policies as political cover for implementing genuinely liberal pro-growth policies that would certainly differentiate the Coalition decisively from Labor.
What Turnbull should do is steal Labor's tax policies, tweak them a bit and then use the proceeds for:
(a) some minor compensation for "bracket creep" (given that incomes aren't rising anyway at present, the need for major compensation for bracket creep is hardly urgent. Turnbull could commit to delivering more extensive compensating adjustments to the marginal income tax thresholds for lower and middle income earners when incomes and economic growth begin increasing strongly again;
(b) a large cut in company tax from 30% to 25% (which would take us down to around the OECD average rate) starting next year, with a longer term expression of intention to move towards a rate of 20% over time. The Henry Review and assessments of most economic observers conclude that a company tax cut would be one of the most effective ways of stimulating investment and economic growth through the tax system.
That sort of cut in the company tax rate is estimated to cost around $9 billion per year. But it would deliver a large stimulus to growth. Paul Keating recently asserted:
Australia's dividend imputation system works such that the company tax is, in effect, a withholding tax – a tax temporarily held by the Commonwealth which is returned to shareholders when their dividends are paid. So, whether the company tax is withheld by the Commonwealth at a rate of 30 per cent or 25 per cent is immaterial – the Commonwealth is going to return the money to shareholders anyway, regardless of the rate.
While this is partly true, it is also somewhat misleading. Many companies don't distribute much of their profit to shareholders as dividends; instead they retain those earnings and plough them back into the company's business to fund growth. Reducing the company tax rate as I am suggesting would give business owners 5% more working capital, on which tax has already been paid, that they can use to fund growth and innovation. That's the major reason why Ken Henry and many other observers advocate that reducing company tax is a very effective way of stimulating economic growth.
But where would the money come from? By stealing/appropriating Labor's already announced tax increase policies, but using the proceeds to fund a big company tax cut instead of paying the States to meet the their own obligations to fund health and education (Gonski etc). Labor's negative gearing/CGT policy is estimated to raise about $5 billion per year on its own after the forward estimates period. That would go a long way towards funding a 5% company tax cut by itself, and it meets the fairness principle because (as Labor itself has argued) most beneficiaries of negative gearing are high income earners.
Turnbull should also adopt Labor's multinational corporations anti-tax avoidance proposals, which are estimated to raise around $500 million per year. Relatively small beer, but every little bit helps. And even a fairly modest attack on high income earners' superannuation perks should be able to raise another $1.5-2 billion or so per year, without the Coalition's core business supporters squawking too loudly (they're not going to vote Labor anyway).
Lastly, Malcolm should also steal Labor's proposal to jack up excise on tobacco products, estimated to raise around $5 billion per year, but in a more moderate fashion recognising that many smokers are from lower income groups. That should still raise around an extra $3 billion per year.
Add all that up and you can see that the Coalition would have more than $10 billion per year (by the end of 2018-19) in additional revenue, raised in an entirely fair and equitable manner. More than enough to fund a 5% cut in company tax, which will boost investment, growth and ultimately jobs and wages, as well as funding a very modest cut in personal income tax marginal rate thresholds (which is all that is currently needed).
What about the States? The States certainly need to raise more revenue to fund increasing costs, especially in health and education. But, contrary to the assertions of some, the States actually have sufficient capacity to raise that money for themselves. They just prefer to pretend otherwise and let the Commonwealth carry the political opprobrium. For example, they could raise rates for existing state taxes like mineral royalties, payroll tax (the least desirable because it is a tax on jobs), and gambling taxes. And there is no constitutional bar to their introducing or increasing the rate of land tax (some States already have it). Other new (and intrinsically fair) taxes that States could introduce include death/estate duties and a road congestion charge hitting drivers who insist on driving their cars to the big city CBDs during peak periods instead of using public transport. There is also no constitutional restriction on States levying taxes on services (as opposed to goods). That's why they can levy taxes on gambling. But they could also look at imposing (say) a tourism bed tax (the NT used to have one) and levying it on people renting out bedrooms to tourists on AirBnB, Gumtree etc as well as mainstream commercial operators. Many of those people are also illegally evading personal income tax and GST, thereby competing unfairly with existing tourism businesses which employ lots of people.
Not only do the States have adequate capacity to raise their own taxes, it's also inherently unfair for them to expect the Commonwealth to incur the odium of collecting taxes (e.g. GST) that the States get to spend. Requiring the States to take responsibility not only for their own spending but their own revenue-raising would be consistent with the constitutional principle of subsidiarity and classical liberal principles of fiscal federalism. By contrast, Labor's Gonski and health funding reforms violated those principles and would if fully implemented have represented the final victory of centralism in Australia. A genuinely liberal federal government would and should make a powerful case for fiscal federalism. The Commonwealth's role in relation to the States could then revert to a subsidiary one of redressing major imbalances/inequalities in smaller States' revenue-raising capacities through much more modest general revenue grants calculated on the same Grants Commission formula used to distribute GST revenue (which still must be collected by the Commonwealth for constitutional reasons).
Will Turnbull and Morrison dare to implement genuinely liberal tax policies like these? Somehow I doubt it, but in my opinion they would constitute both good policy and good politics.
Postscript – It may well be that Turnbull/Morrison DO have real plans to hit negative gearing, but in a different way than Labor. In fact that is exactly what this story from the AFR's Phil Coorey suggests:
The Turnbull government has rejected Labor's policy to restrict negative gearing to new properties and will move ahead with its own plans to target high-end investors by either capping the number of properties that can be geared or limiting the annual tax deductions of which can be claimed.
Depending on where the cap is set, this could raise as much or even more than Labor's proposal, and it would also have the virtue of avoiding distorting the market by confining negative gearing to new properties. You could still have a somewhat higher cap for investment in new properties, which would have obvious desirable aspects, but by still allowing investments in existing homes to be modestly negatively geared it would be possible to:
(a) avoid drastically reducing the market value of existing homes for suburban mums and dads; and
(b) preserve the ability of middle income earners to use the strategy to build wealth while restraining high income earners from radically minimising their taxable incomes with huge negative gearing deductions.
I suspect there's still quite a long way to go on Malcolm's Great Tax Reform Journey, and we may yet end up with better outcomes all round through having something at least vaguely resembling an open, mature discussion.
About Ken Parish
Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.
View all posts by Ken Parish →
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9 Responses to Pssst! Malcolm. Steal Labor's tax policies and slash company tax
I am and will always be Not Trampis says:
It works like this Ken.
The opposition come up with it and so the government must demonisie it and visaversa.
in the old days Menzies would embrace them and claim them as his own! 1961 being the obvious case.
It's good that Labor has stirred the pot a bit — it would have been a very depressing situation if it was another election based on attacking each other's credibility, groups that can't defend themselves easily, and dishonest claims about the future.
Speaking of tax reform, whatever happened to their idea of reducing tax rates by getting rid of deductions?
Tim Macknay says:
…it would have been a very depressing situation if it was another election based on attacking each other's credibility, groups that can't defend themselves easily, and dishonest claims about the future.
It's early days yet, Conrad. It can still be that.
Crocodile Chuck says:
We have a worsening fiscal problem, and the government wants to CUT the tax from business from 30% to 25%?
Only in Australia!
Bill Posters says:
Many companies don't distribute much of their profit to shareholders as dividends; instead they retain those earnings and plough them back into the company's business to fund growth
You're wrong and Keating is right. In Australia the divvy payout is very high by world standards at about 75 per cent.
Reducing the company tax rate as I am suggesting would give business owners 5% more working capital, on which tax has already been paid, that they can use to fund growth and innovation.
Investment in the business occurs before tax is paid.
derrida derider says:
The point Keating was making was not that company tax is WHOLLY a withholding tax but that a very large slab of it is. So your immediately preceding paragraph about the headline rate being above the OECD average is not really right because comparing headline rates between classic 'double taxation' company tax system and ours is comparing apples and oranges. Domestically owned businesses would not welcome a reduction to 25% accompanied by loss of dividend imputation; the effective tax burden on their investors would be higher, not lower, than at present. Further it would, at the margin, push corporate strategies from "steady dividend" to "high capital gain" settings – the latter, of course, usually involving more gearing. Are you sure that's what you want?
Also PJK has a penchant for rewriting history. I'm old enough to remember what he said when he was Treasurer. He reduced the top marginal rate of personal income tax because 'we need to align the top tax rate with the company tax rate because rich people are evading tax by incorporating themselves'.
That is still the best argument for a high headline rate of corporate taxation accompanied by dividend imputation and a floating currency (the last to deal with effects on foreign investment). The usual argument for it put by lefties – that it is a progressive tax like personal income tax – is indeed pretty much untrue.
Bruce Bradbury says:
'we need to align the top tax rate with the company tax rate because rich people are evading tax by incorporating themselves'. That is still the best argument for a high headline rate of corporate taxation accompanied by dividend imputation
This issue could be easily achieved by having a regressive corporate tax. That is, the rate on the first million or so equated to the top personal rate, followed by a lower rate.
Ken Parish says:
I wasn't suggesting abolition of dividend imputation. Nor did the Henry review.
1) I was under the impression that corporate tax cuts were generally considered non-stimulative. Specifically, that while corporations may channel profits into new investments rather than dividends, there's no requirement that they be Australian investments. Certainly, three decades of favourable taxation treatment of corporations by America hasn't created a flood of jobs or tax revenue!
2) A hike in payroll taxes to raise revenue for the States (as you rightly recognize they need it!) would be nothing short of disastrous, with the employment situation already looking dire. A casino tax is fiddling around the edges and won't raise that much revenue (unless there's evidence otherwise?), but the land tax could be an idea. Estate taxes might be an option as well, but ultimately the States deliver so much of the services of government (at least 50%, as I recall) that the Federal Government needs to supply revenue.
Having noted those problems, I think the general idea of the article (that the parties need not be afraid of co-opting good policies from each other) is a good one; certainly, it would be a change from the parties only teaming up on bad policy!
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