The Productivity Commission has proposed a dramatic reduction in Australia’s company tax rate, slashing it to 20% for all but the largest businesses. This ambitious plan aims to invigorate investment and address the nation’s declining productivity. If implemented, it would mark the most significant cut in nearly 40 years, repositioning Australia from one of the highest to one of the lowest corporate tax rates globally.
The interim report, released on Thursday night, is part of a series of inquiries initiated by Treasurer Jim Chalmers to create a more dynamic and resilient economy. Alex Robson, the deputy chair of the Productivity Commission, described the proposal as “ambitious but sensible,” emphasizing the need to stimulate growth through investment and competition.
Rationale Behind the Tax Proposal
Robson argued that Australia’s high company tax rate compared to international peers has been a barrier to foreign investment, driving local entrepreneurs to establish businesses in countries with lower taxes. He suggested that reducing the tax rate for smaller and medium-sized businesses would yield the greatest benefits in terms of local investment.
In addition to tax cuts, the Productivity Commission recommended reducing the complexity of regulations that hinder economic growth. This includes easing the process of supplying homes, building green energy infrastructure, and starting new businesses. “Better regulation and approvals” are set to be key topics at Chalmers’ upcoming economic reform roundtable.
Government and Public Response
Despite the Productivity Commission’s proposal, the government has not indicated that company tax relief is a priority. Instead, it has focused on curbing tax avoidance by multinationals and revising the resource rent tax for gas exporters. In a statement, Chalmers acknowledged the importance of reducing regulatory burdens but did not mention the tax plan.
Public opinion appears divided on the issue. A recent survey by Newgate found that only 25% of Australians support cutting the company tax rate, while nearly half oppose it. Nevertheless, Robson maintained that the commission is “focused on good reform ideas” and believes the proposal deserves serious consideration.
Economic Implications and Future Steps
Economists have long attributed Australia’s declining productivity to a decrease in capital expenditure as a share of the economy. Robson identified the company tax cut as the “main lever” to stimulate investment growth. Under the proposed plan, the tax rate for approximately 1.2 million companies earning below $50 million would drop from 25% to 20%, while around 7,000 businesses with earnings between $50 million and $1 billion would see a reduction from 30% to 20%. The largest 500 firms would not receive additional tax relief.
A notable feature of the proposal is the introduction of a net cashflow tax of 5%, which would apply to all businesses. This measure aims to make the tax package “broadly” revenue-neutral in the long term. According to the report, “The introduction of the net cashflow tax means that while most companies will pay less tax, the total tax burden will rise for some large companies, especially those not undertaking new investment.”
“Overall, the new tax will incentivize new capital expenditure across all firm sizes,” the report stated.
The Productivity Commission will undertake another round of consultations before delivering a final report by the end of the year, setting the stage for further debates on the future of Australia’s economic policy.
