As Jared Diamond has observed in his recent book, Upheaval, a critical element in resolving a personal or national crisis is recognising the problem and accepting responsibility for doing something about it. This is easier to do for trauma or dramatic threats than for ‘slow burn’ crises.
There are a few reasons why. Where there is a slow burn, the problem cannot be brightly seen. It is perceptible to some, but not to all, and there is often dispute as to the nature of the crisis. Dealing with the problem often competes with other priorities. Importantly, the benefit of a solution tends to occur in the future, whereas the costs tend to be immediate.
Our slow burn corporate tax crisis
Our corporate tax system is a slow-burn crisis. The IMD World Competitiveness Yearbook 2019
points out the issue: Australia ranks 51st out of 63 countries for the ‘corporate tax rate on profit’ measure and 23rd on tax policy generally. Of the 15 key attractiveness indicators, for Australia, ‘a competitive tax regime’ is second last.
Australia needs corporate tax reform to remain globally competitive. Essentially, we require foreign investment. Foreign investment leads to capital deepening or greater capital intensity, this results in higher productivity for our workforce. Ultimately that will give rise to higher real wages.
Tax is not the only game in our competitive landscape, but it is an important one. We are becoming increasingly uncompetitive over time. Other countries have lowered their tax rates over the past two decades.
In the year 2000, over three-fifths (58/94) of jurisdictions in the OECD data base had tax rates equal to or greater than our 30 per cent tax rate. Now less than one-fifth (18) are in that category. The greatest change is in the OECD itself with an average corporate tax rate of 32.2 per cent in 2000 and 23.7 per cent in 2018.
While the headline rate does tell a story, we do not do well on effective average tax rates either where we are the ninth worst out of 74 countries according to the OECD in 2017. We were the third worst on effective marginal tax rates.
The US tax reform package of 2017 is a significant development in this trend. The US not only cut their corporate tax rate from 35 per cent to 21 per cent but provided 100 per cent depreciation for capital equipment, albeit with a phase-down over time.
Why is corporate tax reform so hard in Australia now?
The first reason corporate tax reform in Australia is so hard is that the benefits tend not to be immediate. They accrue over the medium to long term as decisions on new investments are made. But the costs are very direct: less revenue is raised from existing projects and business investment. US tax reform, dramatic as it has been, has given rise to substantial short-term stimulus.
The second reason is that the argument that lower taxes leads to higher real wages is not an intuitive one for most of us. The degree to which this occurs is not without differences of view, but such a flow-on effect appears significant.
The third reason is that there is a political perception that with our imputation system, the benefit of corporate tax reductions accrues largely to non-residents. They do not vote. But they do make investment decisions. The burden of corporate tax influences those decisions and we wear the cost of those decisions if they are not in Australia’s favour.
The fourth reason is that driving reform generally needs a sense of brokenness. It is not without accident that the Hawke-Keating tax reform of the mid-1980s occurred at a time when there was significant publicity about bottom of the harbour schemes. The tax system then had high effective tax rates with substantial loopholes, suggesting dramatic change was needed.
Similarly, the introduction of the GST by Howard and Costello was one of fixing a broken system. The wholesale sales tax the GST replaced was shared with only four other countries – Botswana, Ghana, Solomon Islands and Swaziland – and produced immense but hidden costs to business and left us less competitive.
Our current slow-burning crisis of corporate tax reform has less of a sense of brokenness, though failure to deal with it over the long term will be significant.
The fifth reason is that until recent years, Australian tax reform or the call for it, tends to occur in cycles of around 12 years: The Henry Review was 2009, calls for GST and A New Tax System occurred around 1997–98, the Draft White paper was in 1985 and the Asprey Committee commenced in 1972.
Why 12 years? The answer probably lies in the changing nature of the economy and a forgetfulness about how hard tax reform is. Since the Henry Review we have had several poorly managed attempts to get serious tax reform onto the Australian agenda, notably in 2015 by Prime Minister Abbott, which was narrowed by Prime Minister Turnbull and then Treasurer Morrison.
The sixth reason is that Australia is very dependent on corporate tax revenue as a percentage of its total tax take. While many developing countries are highly dependent on corporate tax, we are the second most dependent behind Norway in the OECD.
What do we need to do?
We need to try to build a consensus in the broad community that we have a slow-burn issue on corporate taxation. We need to accept that we have a responsibility to deal with it for future generations. We need to determine how widely or narrowly we should draw a fence around this problem. Could it be dealt with separately from other issues of taxation equity or must it be drawn into those issues? The political and economic answer to that question may be different.
We need to look at what has happened in other nations and why. We need strong empirical support for any change. We need to look to our own history of successful reform and to recognise that we can introduce substantial beneficial change. We also need to develop a public interest shield that serves as a defence to narrow political or economic interests.
Like dealing with climate change, none of this is easy. But the direction is certainly clear.
World Competitiveness Yearbook 2019