Jim Chalmers will get his first suggestions on tax reform from the Productivity Commission this Friday and among them will be a cashflow tax and other incentives for business to invest.
A cashflow tax, which allows all expenses to be immediately deducted from cash inflows before tax is levied – would be a big undertaking for Chalmers but its worth him considering the benefits and disadvantages.
Implementing such a tax could immediately boost investment by encouraging business to take the plunge.
That would help rebalance the private sector share of the economy compared with government, which had grown to 28 per cent of GDP before easing in the first quarter of this year.
It would also go a long way to solving the so called “capital deepening” problem in Australia, which is partly responsible for the lacklustre 60-year lows in productivity. The Treasurer has set productivity growth as his key objective for his second term.
Problems for Chalmers include the immediate hit to the budget in the first few years of implementation of a cashflow tax before recovery in the longer term, as well as all the transition problems such a new tax system would create.
Labor luminaries whom the PC would consult in the preparation of such a tax include former Labor minister Craig Emerson and Ross Garnaut, both of whom have pushed for the tax.
“Moving towards our cash flow tax would stimulate investment while securing the revenue base, but it is best considered as part of a whole tax reform package,” Emerson told The Australian.
“It is a far better proposition than cutting the company tax base while retaining the existing tax base.”
Treasury modelling has suggested company tax cuts recover only 35-50 per cent of the direct cut in company tax revenue through higher tax receipts from increased economic activity.
Commonwealth Bank has argued that company tax cuts are not the priority right now.
Some tax experts such as the Crawford School of Public Policy’s Bob Breunig have suggested Australia’s high corporate tax rates compared to other OECD countries such as Denmark and Sweden have impinged on invest decisions.
“We’ve had some companies that manufacture solar technology set themselves up with Australian IPs outside of Australia instead of inside Australia because of high corporate tax rates,” Breunig said at a mini-roundtable held by independent MP Allegra Spender last week.
Investment in renewables might give Chalmers more incentive to bring some changes to company tax policy and business investment allowances.
When it comes to cashflow tax, there are some who argue it would create have and have nots.
Crawford’s other leading tax policy expert, Viva Hammer, says the problem is the transition.
“The people who are going to invest are going to have a completely different treatment from the people who already invested,” she said.
“You’re going to have a tremendous issue in the years until it’s implemented, because people won’t do any investment because they’re waiting for it.
“I’m not saying that we shouldn’t do it. I’m just saying the transition is extremely difficult, and generally, that’s what … kills the idea.”
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