A Productivity Commission (PC) proposal to change the way businesses are taxed would boost Australia’s GDP by $14 billion with no net cost to the budget over the medium term, the commission claims.
Draft recommendations in the new interim report, creating a more dynamic and resilient economy, would see the company tax rate fall by up to 10 percentage points for businesses with revenue under $1 billion (the vast majority), lifting business investment and productivity growth.
Lower company tax rates are likely to attract more overseas firms to invest in Australia, help people start and grow businesses, and strengthen the ability of smaller Australian firms, which contribute the bulk of capital investment, to compete with larger ones.
These cuts would be coupled with a new 5 per cent net cashflow tax that supports companies’ capital expenditure by allowing them to immediately deduct the full value of their investments. Together, the changes could increase investment in the economy by $8 billion while being revenue-neutral over the medium term.
“If we don’t get our economy moving again, today’s children could be the first generation to not be better off than their parents. We need to spark growth through investment and competition – the best way to do that is to fix our company tax system,” said PC deputy chair Dr Alex Robson.
“Our proposed reforms will begin to shift the company tax system towards one that better supports investment and productivity growth.”
Capital expenditure by all non-mining firms is down 3.2 percentage points as a share of GDP since the end of the global financial crisis in 2009.
The 1.2 million Australian companies that earn below $50 million (on 2022-23 figures) would see their company tax rate fall from 25% to 20%, while the rate for around 7000 companies earning between $50 million and $1 billion would drop from 30% to 20%.
The reduction in Australia’s headline company tax rate would move Australia from having one of the highest to one of the lowest statutory rates for small and medium-sized firms in the OECD.
Company tax would remain at 30% for firms earning over $1 billion. If the net cashflow tax is effective, it could be expanded over time and fund broader reductions in company income tax.
Regulating to promote business dynamism
The interim report also finds that the ever-growing thicket of rules and regulations faced by business is significantly limiting productivity growth.
In consultations for its inquiry, the PC heard that businesses have faced a growing regulatory burden over the past two decades. In the ACT, for example, the average time a house builder must wait for a planning decision is nearly six months. In New South Wales, it takes an average of nine years to get approval to build a windfarm.
“You need so many licences and approvals from different levels of government to start a café in Brisbane that the City Council introduced a check list with up to 31 steps to guide people through the process,” said Commissioner Sterland.
“Regulation is important, but over-regulation is a handbrake on growth. The Government needs to cut through the thickets of regulation that are slowing us down and ensure any new regulations are made with growth in mind.”
The report urges the Australian Government to make a clear public commitment to reducing regulatory burdens, and ensure new regulatory proposals face greater Cabinet and Parliamentary scrutiny.
The Government should set clear expectations for regulators to look for ways to promote economic growth, while continuing to ensure that Australians are protected against avoidable harms. The PC also recommends the appointment of an independent statutory commissioner to give more power to the Office of Impact Analysis, which scrutinises all proposals for regulation.
The PC is now accepting submissions on these reforms to inform the final report that will be released later this year. This interim report is the first of the five pillars of productivity inquiries that the PC will publish over the next three weeks setting out ambitious but achievable reforms to boost Australia’s productivity.
