Canning company tax cuts a victory for commonsense

Small violins could be heard around the nation yesterday as the government finally dumped its company tax cuts.

Company tax in Australia is essentially a prepayment of income tax. Picture: AAP

Small violins could be heard around the nation yesterday as the government finally came to its senses and dumped its beleaguered company tax cuts.

Making a small and easily maligned tax cut for companies the centrepiece of an economic strategy when the two salient economic facts of our time are chronic wage stagnation and soaring asset prices was odd, to say the least.

Even the Treasury studies in favour of trimming the company tax to 25 per cent by 2026 showed a tiny benefit to GDP decades into the future.

If tax cuts ever made sense, debatable given mounting spending commitments, it was wiser to direct them to workers, not investors who’ve enjoyed massive windfall gains in recent years the world over.

Only people pay tax, not businesses, and they, not companies, have endured almost a decade of bracket creep, squeezing their disposable income at the very time the cost of essentials have soared. They also vote.

Cutting company tax to stimulate investment, sound economics, is a far bigger deal overseas when company tax is a double tax on profits.

In Australia, respected economists have furiously debated its merits, leaving the public confused.

Because of our unique system of dividend imputation, company tax is a withholding tax, in effect a prepayment of income tax. So it’s close to irrelevant for Australians who invest in Australian companies.

For them, it’s the top marginal income tax, an internationally high 47 per cent, that cuts in at an absurdly low level of $180,000 that matters.

Given locals barely benefit, the top argument for the policy has been to lure more foreigners, who don’t get the franking credits that make imputation work, to invest here.

Yet foreign investment in Australia has increased strongly and steadily every year since 2012, from $2.17 trillion then to $3.27 trillion at the end of 2017.

If that stops, then cut company tax. Until then, let’s focus on increasing real wages the only way the government tangibly can. There is no political or economic confusion about lowering personal taxes: more consumption, more confidence, less tax avoidance, a virtuous cycle. Doubling the threshold at which the top marginal tax rate cuts in would do far more to lure businesses and talented foreigners here, many of whom gravitate to Hong Kong and Singapore, where almost 40 per cent of their earnings aren’t confiscated.