Company tax is one of the most economically harmful taxes and in global terms Australia is more dependent on company tax than many other comparable countries. Countries around the world, and in our region, have either cut rates or already have substantially lower rates than Australia does.

Yet the Senate is inquiring into a commitment by the BCA to increase investment, employment or wages prior to passing a company tax cut.

Both the concept of the commitment, and the resulting system to monitor performance, suggest a misunderstanding of how company tax cuts will affect the economy.

Making tax cuts conditional on these commitments is another form of regulation, based on the notion that it is only government control that can ensure businesses will do ‘the right thing’ and invest more.

Yet the benefits of the company tax do not flow to wage earners on the basis of a commitment by companies to ‘use’ the proceeds to boost wages or hire new staff. It does not require charity or a social contract with business. In no sense are the benefits reliant on a ‘trickle-down’ effect.

It is the self-interested market that will drive increased investment, particularly by foreigners who receive a higher rate of return than they have done previously.

However this is not the only reason a system of measurement for compliance with any such commitment is not a good idea.

Another important reason is that the corporate tax rate is only one factor of many that determine where a company chooses to invest. In observing movements in investment, wages, productivity and employment in the years following a company tax cut, it will be impossible to separate out the effects of the cut. This is especially the case as the cut is phased in over a number of years.

Evidence of wage growth at companies making the commitment would not necessarily be associated with company tax cuts, nor would any increases in investment necessarily be caused by that commitment. Both could be the result of external effects in the economy.

Nor would the counterfactual in any analysis be current levels of investment, wages or employment. By standing still, Australia risks losing investment to other countries. Investment may have declined in Australia in the absence of a cut.

So not only is such a commitment unnecessary, there is no way to know whether the companies involved met their commitment or not. The Senate should instead look at company tax on its merits.

Simon Cowan and Matthew O’Donnell presented our arguments on tax reform to a Senate Economics References Committee.

Listen to the audio here.