Business tax cuts are good but they leave us with two tiers
Just a day after wearing criticism from former treasurer Peter Costello about failing to carve an economic narrative and relying on distant tax cut promises, Scott Morrison has had a substantial victory. The Prime Minister’s company tax plan emphasises a clear focus of economic policy on reducing taxation for companies and individuals to fuel economic growth. Now, even before returning the budget to balance, Mr Morrison has brought the tax cuts within reach. The overwhelming economic argument for this agenda has been ceded by Labor and Bill Shorten, who took just 24 hours to roll over and support the changes, despite previously rejecting any further company tax cuts. The current rate for companies with an annual turnover below $50 million is 27.5 per cent and it will now be reduced to 26 per cent in 2020-21, on the way to the settled new rate of 25 per cent in 2021-22. Labor’s opposition has blocked Coalition plans to gradually implement this rate for all companies over a decade but its backflip now at least allows all businesses below the $50m threshold to move to the 25 per cent rate. This is unambiguously good news for small and medium-sized businesses and their employees, increasing prospects for growth, investment and wage rises. Buoyed by better-than-expected revenues that will push the budget into surplus next year, Mr Morrison brought forward the tax cuts by five years. The power of his argument has forced Labor to endorse it and the changes will be introduced in parliament next week.
The Coalition’s economic narrative, which has taken longer to take shape than it should have, clearly is all about lowering taxes. The company changes are matched by a legislated flattening of personal income tax rates over seven years. By contrast, Labor promises to increase the top personal income tax rate by 2 per cent (although it might be having second thoughts) as well as raise taxes on real estate and equities investments. Mr Morrison might have preferred to have an election battle with Mr Shorten over the company tax rate. To that extent, it is smart politics by Labor to change its position and allow the Coalition to have its way. But it is also the right thing for the economy when we are looking to boost growth and compete for investment against trading partners that have more attractive corporate taxation regimes.
The Coalition won’t want to look like it is arguing the case for major corporations in the lead-up to the election, so political considerations might shield Labor from the most salient question — if a 25 per cent tax rate is good for small and medium-sized businesses and might encourage investment, growth and higher wages, why wouldn’t that same rate be desirable for companies that turn over more than $50m a year? The same arguments apply; only the politicking differs. For all the benefits of a more competitive company tax rate the nation now will be stuck with a two-tier corporate tax system. This will act as a disincentive for medium-sized companies to grow and for the largest corporations to boost their investments and workforces in this nation. That is a narrative we might not hear for a while.