The proposed tax cuts to the company tax rate has met with fierce opposition and much debate.

Noel Whittaker in the Sydney Morning Herald calls it a ‘crazy idea that looks like getting up’ and blames Tony Abbot, despite it previously being supported by Bill Shorten and currently proposed by Malcom Turnbull.

So why the desire to cut company tax? In Bill Shorten’s own words delivered to parliament in August 2011,
“Cutting the company income tax rate increases domestic productivity and domestic investment. More capital means higher productivity and economic growth and leads to more jobs and higher wages.” In March 2011 in reference to company tax cuts, he stated that “corporate tax reform helps Australia’s private sector grow and it creates jobs right up and down the income ladder.”

Alan Kohler argues that without company tax cuts, investment will significantly move towards the US and other lower-taxing companies like the UK and away from Australia, resulting in fewer jobs and economic activity, whilst suggesting the problem may be with how company dividends are taxed. Countries with lower company tax rates see higher amounts of profits reinvested, leading to jobs and wages growth as well as more taxes generated.

So if cutting the company tax rate sounds like such a good idea, why is there such a vehement response against it.

Noel Whitaker argues that

  1. Many privately-owned businesses are structured through trusts and a company tax cut won’t affect them,
  2. The proposed tax saving is so small it is not worth worrying about,
  3. Companies have larger concerns with government red-tape and other taxes such as payroll tax,
  4. Taxation of dividends at the personal level means individuals won’t be better off,
  5. A two-tiered taxation system leads to complications, should the reductions be for ‘small businesses’ only, and
  6. Australia can’t afford it.

Peter Martin in the Sydney Morning Herald on 31st January states ‘new research ridicules the Prime Minister’s claim that cutting the company tax rate will boost foreign investment’, as foreign investors come from companies with lower tax rates.

So what to make of this, how do privately-owned businesses fit in and what do privately-owned businesses want.

The answer from most companies would be an unequivocal yes to tax cuts. Lower company tax will lead to more cash in the company’s bank account, allowing greater reinvestment of profits, increased growth and ultimately more employment and profits. Increased employment and profits result in more tax collected through greater overall payg withholding tax on wages, GST and company tax, as well as other taxes such as payroll tax.

what do privately-owned businesses want

Should the company wish to pay out dividends, the tax collected will not drop due to Australia’s system on how individuals are taxed on company dividends. This is Alan Kohler’s key point. Total tax take won’t drop on dividends paid, but companies can reinvest for growth.

In response to Noel Whittaker’s claims, he is correct that many businesses are structured through trusts, but this shouldn’t affect company tax policy. Yes, the tax saving may be small, but every cent helps. And yes, there are big concerns with red-tape and other taxes like payroll tax, but again, every cent helps. We already have a 2-tiered tax system with the small business entity rules and the argument about whether Australia can afford tax cuts and whether the tax cuts would ultimately generate more tax revenue could go on and on.

Peter Martin’s argument that foreign investment won’t change with a lower company tax rate doesn’t completely stand up, as companies invest based on their return on investment. If their return is forecast to be higher due to lower tax, they are more likely to invest. Where companies are comparing countries for investment or whether or not to make extra investment, the company tax rate will play a role.

So ultimately, a cut in company tax rate would be greatly welcomed by Australia’s privately-owned business community.

Increased opportunity to reinvest profits, leading to higher employment and economic activity and ultimately, more tax on wages and GST collected would benefit everyone.