Cut company tax like we did tariffs

Senior officials from the Australian Treasury have stated that company tax is similar to a tax on imports of foreign capital. They argue Australia has benefited from tariff cuts and we will similarly benefit from cuts to the ‘tariff’ on imported capital. The reforms to common-variety tariffs have made cars, clothing and electronics cheaper, improving our standard of living, and have reduced a hefty tax on business inputs. The benefits have been shown in numerous studies.

But Australia is still lumped with the one remaining sizable tariff on foreign investment — through company tax. And unsurprisingly, there are numerous studies showing the benefits of cutting this tax. Treasury has found that the tax cut will lead to an improvement in GDP of around 1%, and a gain to national income of about 0.7%.

Some argue this isn’t much, but it is in fact quite substantial, as Treasury has argued: the gain to GDP is only slightly less than the benefit from all the major telecommunications, ports and rail reforms in the 1990s, which lifted GDP by about 1.25%.

The tariff debate didn’t hinge on whether tariff cuts were budget neutral: and we should apply the same logic to company tax cuts. And tariff reform wasn’t cancelled because government funds needed to be spent in other areas such as education. Again the same logic should apply to company tax.

We didn’t see many people argue against tariff cuts because they caused windfall gains to foreigners, and that approach should guide the debate on company tax. The tariff cut debate instead focused on which businesses and workers gained and lost, and this could apply to company tax: fortunately for workers, research finds that they gain the greatest benefit from a tax cut, a point acknowledged by the ALP’s Chris Bowen and Andrew Leigh.

So let’s remember the lessons from economic history and reduce the burden of company tax now.