ESSAY 13: ECONOMIC BALLAST
LONG TERM RATES FOR CORPORATE INCOME TAX
From Essay 1:
“The greatest single action our politicians can take to broaden Australia’s economy, is introduce the lowest corporate tax rate in the world for our secondary industries. Australia’s politicians never raise the following reality, in comments on our corporate tax rate: Global competition adversely impacts our secondary industries – manufacturing inclusive of generic software – far more than our primary (farming and mining) or tertiary (services) industries. The USA has led G7 proposals to introduce global tax rules to deter countries – like us – with little revenue to lose from low taxes on manufacturing – chasing Ireland’s success in IT. We should back Ireland, not the G7. An alternative is for us to ‘win the race’ to the G7’s ‘minimum tax’ of 15% (but again, only for our secondary industries).”
Extraction of Non-Renewable Resources
From Essay 8:
“The current resource charging arrangements imposed on non-renewable resources by the Australian and State governments should be replaced by a uniform resource rent tax imposed and administered by the Australian government.” (Note 1)
“natural resource royalties and taxes (of whatever nature) should be maximised and permanently invested in an Australian Sovereign Fund (with monies released from the Fund to be limited to income and realised net capital gains).” (Note 2)
How the following suggestions for corporate tax rates, measure up against costs/contributions to Australia’s Federal Treasury, is beyond this essay’s scope.
What follows should be regarded as conceptual ideals, of options for the longer term.
Low Corporate Tax Rate for Secondary Industry Income: 10 % (15 % at most)
This proposal exploits Australia’s unrecognised ‘competitive advantage’ for local manufacturing:
The relatively low ‘opportunity cost’ to our Commonwealth Treasury of setting a ‘world beating’ (low) corporate income tax rate for all manufacturing conducted in Australia.
This policy avoids the trap of federal politicians attempting to ‘pick winners’. It would be politicians demonstrating ‘entrepreneurial nous’ of creating ‘local competitive advantage for minimal national cost’.
A lower corporate tax rate applying to local secondary industry would embrace the profits of:
– all traditional forms of manufacture (physical goods);
– the local design and sale of generic software (future Atlassians and Canvas, etc);
– value-add processing of agricultural produce;
– value-add processing of minerals and resources;
– manufacture/application of product packaging;
– such products, as foreign-owned businesses become attracted, to make in/sell from Australia.
Practical challenges of implementing this policy are acknowledged under the heading Additional Comments further below.
Standard Corporate Tax Rate for Most Other Income: 30 % (minimum)
Context: Permanently retain 100% tax deduction for ‘cash outlays’ on ‘depreciable plant’ (excluding items of potential ‘household’ usage eg cars, TVs, etc).
In theory, corporate tax rates should be benchmarked toward a tax system’s maximum marginal rate for personal income tax. In that context, Australia’s current main corporate tax rate of 30% is relatively low.
In the context of Australian-based primary (agriculture and mining) and tertiary (services) industries, comparisons to international corporate tax rates (as justification for lower corporate tax) are almost invariably, red herrings:
While Australian farms and mines (primary industries) compete against commodity producers globally, nobody can relocate Australian-based farms and mines (and jobs required to operate them) overseas (unlike our factories and generic software design businesses).
Similarly, while some Australian service providers (tertiary industry) compete against overseas players, nobody can export their core customer base – by definition located in Australia – overseas (unlike our factories and generic software design businesses).
Higher Corporate Tax Rate for Mining and Natural Resources Income: ? %
This essay is open to how State revenues from mineral and natural resource projects are best transferred to the Federal Government.
The only real imperative, is that our Commonwealth receives maximum dollar, when exhausting Australia’s non-renewable bounty.
Whether such dollars are best maximised by ‘transparent contribution’ (through a higher corporate tax rate) or ‘project-by-project-negotiation’ (of royalties for specific resource projects) is beyond this essay’s immediate scope.
The transition of revenues from the States to federal government on existing projects is obviously fettered, by each project-owner’s contractual rights. Accordingly any ‘federal takeover of resource rents’ would likely involve the Federal Government taking over ‘as is’ the various States’ rights, in existing contracts, whatever revenue system the Federal Government might adopt for future mining and resource projects.
Undistributed Profits Tax
Consideration should be given to a smart version of the old ‘Undistributed Profits Tax’ for private companies (given the discrepancy between corporate and maximum marginal personal income tax rates).
A modern version of the ‘UPT’ could be designed to avoid impacting upon profits retained within a company / corporate group for purpose of reinvestment (including as working capital buffer). Such reinvestment might be within a defined period (say within two years of the tax year, when the profit was earned).
The proposals would be implemented on the same day as the federal government terminates ‘untied’ grants (inclusive of GST distribution) to states and territories; together with the forgoing by states, of entitlements to mineral and resource rents.
The proposals are one part of massive reform of our federal system of government.
Re: Low Corporate Tax Rate for Secondary Industry Income
Applying a lower corporate tax rate for manufacturing in Australia is obviously more complicated where a given company or corporate group: (a) is involved in secondary industry as well as primary and/or tertiary industry; and/or (b) manufactures products partially in Australia and partially offshore.
Whilst these complications presents challenges for the design of legislation (for a differential tax rate, for locally conducted secondary industry) such challenges are addressable. This could extend to defining the proportion of local-made content (where needed) by reference to geographic wage splits.
Sectoral arguments against these proposals are likely to be numerous and noisy, but not overwhelming.
They are best addressed as various sectoral players make their objections.
For and on behalf of Common Sense for Australia Inc
Authorised for publication, 3 March 2022
Note 1: Excerpt from Recommendation 45 of the Federal Government’s Henry Review (Australia’s Future Tax System (Henry Review), 2009, Final Report to the Treasurer)
Note 2: Quotes comments in Essay 8 under the heading “Looking further at (iv) above – natural resource tax as an option for increasing state revenue“.