Fed’s taxing times
Corporate cuts warning
THE head of the Reserve Bank has warned any corporate tax cut in Australia cannot come at the expense of higher Budget deficits and says recent cuts to business taxes in the United States are “problematic”.
RBA governor Philip Lowe says the US, UK and Europe have either cut corporate taxes or are considering a cut to their rates.
“It does look like there is a form of international tax competition going on,” the central bank boss told a Federal Government economics committee hearing in Sydney yesterday.
Dr Lowe said the comparative corporate tax rates of nations are import- ant, with a recent International Monetary Fund report noting that relative tax rates do affect international investment.
“We mightn’t like it but we can’t ignore it,” he said.
However, Dr Lowe cautioned any tax cuts for business in Australia must not put pressure on the federal Budget.
“If we were to respond to this competition by having lower corporate tax rates here it’s really important that that doesn’t come at the expense of higher Budget deficits,” he said.
Dr Lowe said the recent tax cuts introduced in the United States, which cut business tax rates from 35 per cent to 21 per cent, were “exactly the reverse” of a move that kept pressure off deficits.
He said the US had cut its Budget deficit to just 2 per cent of GDP but under the impact of the new cuts future deficits would be much higher, at 5 per cent of GDP, despite the economy already growing strongly and unemployment falling.
“I think that’s very problematic and if we were to go down the direction of having lower corporate tax rates I think it would be a big mistake to do that on the back of higher Budget deficits,” he said.
Dr Lowe said running restrained Budgets was a form of insurance in the event of another major economic downturn as it would allow the Government to spend to stimulate the economy, as Australia’s government did during the GFC.
“We will only be able to do that if we have run a sensible Budget policy in the interim,” he said.