Sooner or later we will have to cut company tax rates

It is not a matter of if, but when, the rate of company tax is reduced in Australia. When almost every developed economy has cut or is in the process of cutting their rates of company tax, Australia will have no choice but to follow suit.

And let us not forget that many of these economies are run by centre-left governments that you might think would baulk at reducing company tax — think France, the Nordic countries, even Britain (yes, Theresa May is probably centre-left these days).

No one is saying that, in a world of mobile international capital, relative rates of company tax are the only consideration for companies considering where to invest their money. But it is an important consideration and this is one reason Australia will have to play follow the leader.

It’s not as if the government’s 10-year enterprise tax plan is particularly radical. It will take the full decade before the rate of company tax is 25 per cent for our largest companies, at which point we will still look out of whack with other countries.

It is often said that the system of dividend imputation makes the case for a cut in the company tax rate here much less compelling. This is incorrect because shareholders are likely to be better off by virtue of a higher stream of dividends associated with more consequential investment. There is also the problem franking credits are not available to overseas investors.

Now there is a very arcane debate about whether overseas portfolio investors can effectively capture the benefits of franking by a judicious selling and buying of shares, pre- and post-dividend payment dates. But we should be more interested in foreign direct investment, which is almost certainly negatively affected at the margin by high relative company tax rates.

The research is clear — there is a very clear explanation in the Henry tax review — that lower company tax rates lead to higher real wages for workers. Indeed, most of the gains are captured by workers, something you might think would sway the thinking of both Labor politicians and the ACTU leadership, as well as the Senate crossbenchers.

Having said this, we should immediately dismiss the case for some regulated arrangement where companies secure a lower company tax rate only in exchange for guarantees of more investment and higher wages. The compliance costs of such and arrangement would be massive and inevitably would lead to gaming by companies.

Some types of companies just need to make large investments compared with others. The taxation regime needs to be quite neutral to these differences.

As for the idea that the lower company tax rate should be denied to the major banks, this is completely ridiculous. After all, the major banks are an important part of the economy, acting as financial intermediaries.

And, by the way, they are largely owned by Australians, including many mum-and-dad investors.

Let’s not forget that the banks (and Macquarie) have already been whacked by the major bank levy introduced after last year’s budget. Set at 0.015 per cent of the banks’ liabilities, excluding deposits, it should also be noted that the payment of the levy does not carry franking credits.

Senator Hinch might need to take this impost into account when he considers how he will vote on the government’s enterprise tax plan.

There is another reason it is important the enterprise tax plan should be passed. The cost of the plan is already in the forward estimates and, in this sense, the sequential cuts to the company tax rate are fully costed.

Should the plan fail to pass the Senate, the big-spending Labor Party will simply replace these costings with their own wasteful spending initiatives. If the plan does pass the Senate, however, Labor will have to come clean on whether it will reverse the cuts to company tax rates, including the ones that already apply to smaller businesses.

My guess is it would be loath to do so.

But then, I never thought Labor would seek to ditch cash refunds for franking credits that will hurt the less well-off while leaving the wealthy unaffected.