Productivity Commission pushes for 20% corporate tax rate
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The news: The Productivity Commission has recommended the government cut the corporate tax rate to 20%, excluding companies with annual turnover above $1 billion, which would continue to pay the current 30% rate. It has also proposed a new 5% net cashflow tax aimed at boosting productivity and encouraging investment.
In a new interim paper, the Commission has further urged the government to reform regulation by establishing a clear agenda for regulatory overhaul.
It recommends appointing an independent statutory commissioner to oversee the Office of Impact Analysis, expanding parliamentary committees’ remit to scrutinise new regulations, and holding public servants accountable for delivering growth, competition and innovation.
The numbers: There are 1.2 million companies earning below $50 million, currently paying a 25% company tax rate. Another 6870 companies earn between $50 million and $1 billion and pay the 30% rate.
The proposed net cashflow tax would allow companies to immediately deduct capital expenditure from profits in the year it is incurred, a measure designed to spur capital investment and improve economic dynamism. However, it would remove the deductibility of interest expenses.
The paper argues that eliminating interest deductibility “will reduce the tax system’s bias towards debt”, allowing newer and growing firms, which tend to rely more on equity, to better compete with larger incumbents.
The modelling suggests that reforming corporate tax could boost capital expenditure by 1.6% and is considered to be one of the most significant potential areas for reform.
The two proposed tax changes would together increase economy-wide investment by $8 billion, according to the Commission's modelling, and would be revenue-neutral in the medium term.
The context: This is one of five interim reports due from the Productivity Commission ahead of the federal government's Economic Reform Roundtable on 19 to 21 August. The recommendations will become talking points ahead of, and during, the roundtable with the government releasing its roundtable agenda for the three day-event.
Day one will focus on resilience, day two on productivity and budget sustainability, and day three on tax reform across, spearheaded by talks from RBA governor Michele Bullock, Productivity Commission chair Danielle Wood and Treasury secretary Jenny Wilkinson. So far, 23 attendees have been invited as a "core group" but more invitations are due to be issued for specific sessions.
Australia’s headline company tax rate remains one of the highest in the OECD. The Commission notes that its proposed reforms would shift the country towards having one of the lowest rates for small and medium-sized businesses.
What they said: “Our proposed reforms will begin to shift the company tax system towards one that better supports investment and productivity growth,” said Productivity Commission deputy chair Alex Robson.
“We need to spark growth through investment and competition – the best way to do that is to reform our company tax system,” he said.
Treasurer Jim Chalmers said the government welcomed the release of the paper and would “work through” the issues in the coming weeks.
“We’ve already got a substantial productivity agenda underway, but we’re ambitious to do more where we can,” he said in a statement.
“Reducing regulatory burden is an important part of our productivity effort and we're working with regulators on potential reforms to be considered as part of the roundtable process,” he said.
“We recognise that the best way to strengthen our economy and make it more productive is to work through these issues in a methodical and considered way in collaboration with business, unions and the broader community.”
He said the roundtable would cover a wide range of issues including competition, capital attraction, AI, approvals, innovation and regulatory reform.
The source: Productivity Commission's Creating a more dynamic and resilient economy interim report
