They used to call it horse-and-sparrow economics the idea that if you fed the horse enough oats, some would pass through for the sparrows. These days, we call it trickle-down economics the idea that if big entities get a windfall, a bit of it will eventually leak on to the rest of the population.
Trickle-down economics is at the heart of the Turnbull governments case for a company tax cut to Australias largest businesses. On the night of the May 2016 budget, the Liberals released modelling that Treasury had commissioned on the impact to households.
It estimated that cutting the corporate tax rate for Australias largest firms from 30 per cent to 25 per cent, funded by raising personal income tax rates on middle Australia, would boost household income by 0.1 per cent in the 2030s.
Thats the equivalent of just one months extra household income growth in the 2030s.
Theres a few reasons why cutting the corporate tax rate for our largest businesses does little for growth.
Despite all the hyperventilating from the Liberals and their backers, our company tax rate is far from the highest in the world. An analysis last year by the US Congressional Budget Office ranked Australias statutory rate as 10th in the G20. We rank below average when measured by the effective company tax rate. And unlike some other countries, we dont have company taxes at the state or local level.
Another reason that cutting the company tax rate isnt a panacea for growth is that it rewards yesterdays investment decisions as much as todays. If a company is making profits from old investments, it benefits just as much as if it is making profits from new investments.
For some firms, a company tax cut provides a windfall, but doesnt change behaviour. This is especially true for those companies that occupy a dominant position in the market. If youre a monopolist, a company tax cut is likely to go straight to the bottom line. Given that two-fifths of Australian shares are overseas-owned, a big business tax cut could readily end up in the pockets of international investors. Its foreign aid for the top 1 per cent.
Thats why many economists suggest that instead of cutting the company tax rate for everyone, it makes more sense to improve the incentives to make new investments. That way, taxpayers get more bang for their buck, because theyre not paying firms to keep doing precisely what they did last year. Investment incentives encourage companies to buy new vehicles, update software, or invest in fresh equipment. When our firms invest, the benefits stay here in Australia.
Thats why Labor has announced thatfrom July 1, 2020, a Shorten government would implement a New Australian Investment Guarantee, allowing businesses to immediately deduct 20 per cent of investment in eligible depreciable assets, except structures and buildings.
Our proposed Investment Guarantee would apply to eligible investments over $20,000, and would include depreciating intangible investments, such as patents. To the extent that an investment was not written off in the first year, it would continue to be deductible over the effective life of each asset.
Accelerated depreciation isnt a new idea. In 2012, Labor put in place a permanent $6500 instant asset write-off for small business. When they came to office, the Liberals first scrapped it, and then in 2015 restored it. They made the write-off more generous ($20,000), but made it temporary. The policy was due to end in mid-2017, but was extended a year, and is now due to end in mid-2018.
Unless youre in a temporary economic downturn, investment policies with sunset clauses are rarely a good idea. Thats why Labors Australian Investment Guarantee does not have end date. We dont just want to bring forward a bit of investment we want to tangibly raise the incentives to invest.
As President Obamas former economic adviser Jason Furman puts it: Bonus depreciation and expensing operate as a de facto interest-free loan to businesses firms get larger deductions today, reducing current tax payments, and smaller deductions in the future, increasing future tax payments. Not surprisingly, the inclusion of new depreciation measures in President Trumps recent tax package received bipartisan plaudits.
At a time when many Australian firms are telling us that theyre struggling to get access to credit, accelerated depreciation can help. Likewise for firms on a growth trajectory. If you want to grow your enterprise, Labors tax plan wants to encourage you to do just that.
The key difference between the Liberals company tax plan and Labors company tax plan is that the Turnbull governments approach rewards old investments. By contrast, Labor wants to encourage new investments. While the Liberals hope that their company tax cut will lead to growth, our policy requires it. Its an investment guarantee, not a gift to overseas shareholders. No trickle business.
