Company tax is more than a political football

The company income tax rate is to be cut to 25% in 2022. You read that correctly — but it’s not happening in Australia. It is happening (of all places) in France — one of the most heavily taxed nations on earth and one whose politics we have come to think of as always being several degrees to the left of ours.

So if France can cut its company tax to 25% and Australia can’t, it makes one wonder what is going on here.

In fact, it’s not only France. There is a worldwide trend towards lower corporate income tax. The shift was in place even before the US federal rate was cut to 21% earlier this year, but that change has given the trend a new and massive push.

As the tax on internationally mobile capital goes down, Australia as a destination for global capital — far from being unable to afford a cut in its company tax rate — cannot afford not to.

The fact we have a dividend imputation system does not change that reality. Nor does the nauseating repetition of slogans pitting funding for schools and hospitals against tax cuts for banks.

The question is whether we wake up to the need for lower company tax now, based on conjecture, or wait for the consequences of not cutting company tax to become ever more apparent.

The consequence would be a continuation of the weakness in business investment we are already seeing. Investment is the lifeblood of growth in productivity, the economy, employment and real wages.  Growth can continue for a while without it — but not forever.

Company tax has become a political football; with the focus no longer on the economic case for a cut, but on the game of scoring points for the next federal election.

Right now the most likely outcome is that we are stuck indefinitely with a cumbersome, inefficient two-tier company tax rate; premised on the mistaken belief that the economic benefits of a lower rate depend on the size of the company.

Sooner or later — whether it happens under the current government or a future one — an across-the-board cut will be seen as an economic necessity.