Australia must follow the US with major tax reform

Orica managing director Alberto Calderon. Pic: Colin Murty

Orica chief executive Alberto Calderon must be feeling very lonely.

On Friday, at the Melbourne Mining Club, Calderon supported my views that a big chunk of the costs of any corporate tax cuts would be born via lower dividends for retirees and there were better ways to stimulate investment and growth.

And of course I supported him.

Today, major corporate chiefs including Alberto’s old boss, BHP CEO Andrew Mackenzie and the bosses of Woodside and Qantas came out strongly in favour of tax reductions.

For me, even more important, my web site commentary attracted extensive debate.

First I want to thank all those who contributed, including those with a different view to me. This is a controversial subject where different views improve the debate. And I also want to add how much I appreciate the regular comments, favourable and unfavourable, that readers make. It enriches the subjects.

On the subject of franking credits there are clearly deep feelings. So I want to elaborate on the facts, as I see them, and put them into a global context so there is a better framework for that debate.

Part of the argument for corporate tax reductions is that if we do not follow the US in corporate tax cuts we will be left out in the cold in global investment. I don’t disagree, but we are concentrating on a small part of the US tax package and funding a big slice of the consequent revenue loss from one segment of the community.

For me that’s not only unfair but is a high-risk strategy.

The US tax package did include a substantial reduction in company tax but it was not as big as it looked because many deductions were eliminated. And the company tax reduction was part of a total reorganisation of the US tax system including income tax reductions, the ability to write off capital investment in a five year window, substantial help for small enterprises, low once-off taxes on overseas cash and a reduction in tax via substantial regulation reduction. There is no doubt it will stimulate the US economy. The market fears it may go too far and lift interest rates.

If the Australian government was really planning to follow the US and proposing a substantial tax reorganisation it would have my full support. The government, supported by the CEOs, says that a reduction in Australian company tax (much less than the US) will stimulate investment, create jobs and lead to wage rises, as the US measures have done. So let’s dig deeper.

In the case of overseas-owned companies which do not participate in franking credits lower taxes are a total plus and will certainly stimulate investment considerations. The Australia proposal is far inferior to the US. However it will help. Without all the other US measures, including the slashing of taxes via less regulation, I can’t see much of the tax cut going to wages.

For Australian-owned listed companies the tax cuts will cause a rise in net profits which, in complete isolation, would boost share prices. And that argument is the strongest argument against my contention that retirees relying on income will be worse off. They will receive less cash but their shares will be worth more. In an environment where interest rates are rising this contention is controversial but its validity needs to be recognised.

So if tax is reduced companies will have cash to spend. The government hopes that that extra cash will boost investment, pay rates etc and this is backed by the CEOs. That means that our CEOs are telling their shareholders not to expect compensating dividend rises.

But if there is no change in dividends then those receiving fully-franked dividends will have their franking credits reduced and so their income will fall. Those shareholders are in reality meeting a major part of the national cost of the tax deductions where companies are Australian owned.

Local shareholders will not take income reductions kindly and will press very hard for higher dividends so that the blows they suffer will be reduced. If they are successful then the government’s aim to boost investment, wages etc will not be as successful as the CEOs are promising.

Here we go back to where all this started. Adjusting only one part of the taxation system that lowers benefits to a selected segment of the population is not the right way to go.

If we are really serious about competing with the US we need to follow the US and reorganise the whole system. Then there can be offsetting measures to franking credits blows.

Given the above reluctance to undertake a major tax reorganisation. the plan put forward by the CEO of Orica to allow accelerated capital write-offs and research allowances is, in my view, the best way to go.

That will directly incentivise companies to join the technology revolution. This is a debate that will not go away and I recognise there are other views.

But guess who can see how to turn small shareholder anger into a vote winner? Pauline Hanson.