Slash tax rate or lose investors, warns Treasury

Treasury has warned that Australia would suffer a 1 per cent hit to growth if it did not ­respond to the US tax cuts.

Federal Treasurer Scott Morrison. Picture: AAP

Treasury has warned that Australia would suffer a 1 per cent hit to economic growth if it did not ­respond to the US move to dramatically lower corporate tax rates poised to pass congress.

An updated Treasury briefing to the government this week confirmed there would be a significant recessionary impact on the Australian economy and a potential downgrade to revenues that could put at risk the sustainability of Australia’s tax base and the ability to fund the delivery of essential services.

There was a “broken nexus” ­between Australia and other OECD countries, it claimed, that eventually would force a ­revision of tax revenue and the government’s budget position unless the next round of corporate tax cuts was passed by parliament.

The Treasury analysis, ­passed to the Treasurer’s office this week and obtained by The Australian, included an update on an International Monetary Fund report released in October that singled out Australia as risking being marooned with one of the highest company tax rates.

US Republicans yesterday sealed a deal to reduce the US company tax rate from 35 per cent to 21 per cent. The tax package was passed by the US Senate and House of Representatives. Final approval of the Trump administration legislation was due to ­return to the house overnight.

The pro-business reform that delivers President Donald Trump’s first major legislative ­triumph, has been pitched by ­Republicans as lending support to big corporations and small businesses to boost economic growth.

“The United States Senate just passed the biggest in history tax cut and reform bill,” Mr Trump tweeted yesterday.

Amid the spectre of US company tax cuts, Treasury noted that Australia historically had played a game of “catch-up” when the rest of the developed world had reduced company tax rates.

This has kept Australia at or below the OECD average corporate tax rate. When other countries have shifted, Australia has soon followed.

However, Treasury said this process had stalled since 2001, with successive governments failing to keep in touch with the changing global tax environment.

In a stark wake-up call it said: “That nexus has now well and truly been broken. In effect, we have gradually been left behind since our last company tax cut in 2001.

“As such, Australia is increasingly vulnerable to what are major step changes in the global tax environment, such as the US plan for a 15-percentage-point company tax rate reduction.”

It also warned of significant effects on the budget, wage growth and investment, suggesting that failure to implement a lower company tax rate would lead not only to a subsequent reduction in the level of real GDP but would “exacerbate concerns ­regarding the sustainability of the Australian tax base”.

“(The government) may need to reconsider … medium-term tax receipt projections once the ­parameters of the US proposal are clearer,’’ the Treasury report says.

Under the next phase of the federal government’s enterprise tax plan, which Labor has refused to support, the company tax rate for all businesses would be ­reduced from 30 per cent to 25 per cent.

Although still higher than the US and other countries such as Britain, this rate would limit the impact of lower rates overseas.

The US company tax rate, however, is critical because as the world’s largest economy, a cut would result in investment and capital flowing back into the country at the expense of nations such as Australia, whose higher tax rates would make it uncompetitive and less attractive as an investment ­option.

Scott Morrison told The Australian that the Treasury analysis confirmed the IMF forecasts, which at the beginning of the year had been only hypothetical.

The Treasurer said they were now a reality. “The Trump tax cuts are coming. If we fail to respond, they will take Australian jobs, investment and wages with them,” Mr Morrison said.

“Bill Shorten’s refusal to support the government to reduce taxes and support Australian businesses to be competitive will send jobs, higher wages and growth offshore.

“Bill Shorten does not only want to stop business going forward, he won’t even turn up to stop them being overrun by their international competitors.

“On economic policy, Bill Shorten is working for Australia’s competition. He’s helping overseas countries take business, investment, jobs and wages away from Australia.”

Opposition Treasury spokesman Chris Bowen said on Tuesday that Labor believed in “budget ­repair”, maintaining the opposition line that further company tax cuts were too “expensive”.

“You can believe in budget ­repair or you can believe in a big company tax cut, you can’t really believe in both,” Mr Bowen said.

“This is very expensive for our budget. We’ve always got to have a view to competitiveness, but companies will always invest across the world based upon a wide range of factors, of which tax is one.

“The fact of the matter is that governments have to prioritise,” Mr Bowen said.

He said he thought Australia would continue to be a “very attractive investment destination, for a whole range of ­reasons, which go the strength of our economy, the strength of our workforce, our attractiveness as an investment destination”.