James Paterson (Victoria, Liberal Party) Share this | Hansard source

I realise that Senator Dastyari and others may be sceptical about my views on this issue, and so I will not rely alone on my views on the facts and evidence that I will take you through here this morning. I will rely on the views of those that I know that Senator Dastyari respects greatly—that is, the views of his own Labor colleagues, who helpfully have been on the record extensively on this issue in recent years and who, I think, have made some very sensible observations. There was the comment made by the then Assistant Treasurer, Bill Shorten, who is now our opposition leader. He said in 2011:

Cutting the company income tax rate increases domestic productivity and domestic investment. More capital means higher productivity and economic growth and leads to more jobs and higher wages.

I could not have put it better myself. Chris Bowen, in his 2013 book Hearts and Minds, said:

It's a Labor thing to have the ambition of reducing company tax, because it promotes investment, creates jobs and drives growth.

Hear, hear, Chris Bowen; absolutely spot on. Bill Shorten also said in 2011, again as Assistant Treasurer:

Any student of Australian business and economic history since the mid-80s knows that part of Australia's success was derived through the reduction in the company tax rate.

We need to be able to make life easier for Australian business, which employs two in every three Australians.

Hear, hear; I could not agree more.

Senator Watt said before that reducing our company tax rates because other countries have done so to ensure that we remain internationally competitive is like following someone who has jumped off a bridge. That was a particularly graphic metaphor that I encourage him, when he has an opportunity, to discuss with Bill Shorten, his leader, because it in fact repudiates Bill Shorten's previous view on this issue. Again as Assistant Treasurer, in 2011, he said:

The Government's tax reform agenda has a strong focus on ensuring that Australia remains an attractive place to invest.

…   …   …

Cutting the company tax rate is an important step along this road.

This recognises the benefits to investment and growth from lower company tax rates and a trend to lower rates across the OECD over the past 30 years.

Senator Watt here today is repudiating the very words and arguments made by his own leader not more than six years ago.

Chris Bowen, again in his book, in 2013, in the chapter 'Promoting growth through cutting company tax'—what a great title for a chapter on economic reform; I could not have written it better myself, Senator Dastyari—said:

… Keating knew that the corporate tax rate needed to be cut to make Australia competitive, that capital and investment would flow to tax-competitive nations and that this was an important job-creation move. Today capital is even more mobile than it was then and it is important that our corporate tax rate is more competitive.

I did not know that—in Senator Watt's words—Mr Bowen was an enthusiast for jumping off a bridge to follow others, but it seems that he is. I encourage Senator Watt to take that up with his now shadow Treasurer.

Of course the shadow Treasurer also said on Lateline in December 2014:

I'd like to see it—

'it' being the company tax rate—

lower over time. I think we've had 14 years of having the corporate tax rate stable. That's too long. Over time, I'd like to see it lowered.

Indeed. He went on to say:

As the alternative Treasurer, I'm telling you that … it would be a better thing if Australia's corporate tax rate was more competitive …

That is very hard to argue with. In 2013, he said:

I think we should have the ambition of lowering company tax. … it would be the approach that we would take that our ambition would be lower company tax rates over time because it does improve our international competitiveness.

Again, I think that is very eloquently responding to Senator Watt's arguments before.

I was very touched to hear Senator Watt's concern about the federal government deficit and the debt that has been accrued and continues to accrue under the federal government. I share his concern, and I am very pleased to see him speaking about it here, but I think that unfortunately, in this instance, he is being a little bit disingenuous, on a couple of grounds. First of all, as we know, the Labor Party's record in government in this area is not one to boast about. They inherited a very good set of books, and they left them in a parlous state. There is no need to go over the ancient history of details of that, but I think their record in this department is abundantly clear. Also abundantly clear are the extraordinary lengths they have gone to to attempt to prevent this government from fixing the mess that they created and to attempt to prevent this government from paying for the things that they spent on when they were in government.

But particularly disingenuous by Senator Watt was the fact that he believes that these company tax cuts are going to expand the deficit and expand the debt. It is disingenuous because, as Senator Watt I am sure would know, the Labor Party during the election campaign spent not just every single dollar that would be spent in this company tax cut plan but $16½ billion extra. So Senator Watt's concern about the deficit I think would be more fairly and better focused on his own party's policies. Even if the company tax cuts did not proceed, it would be worsened by at least $16½ billion, just taking their election policy into account and not even taking into account what they have proposed since.

And, of course, it is another thing which the shadow Treasurer, Chris Bowen, has refuted, and I think he is right. Again in Hearts & Minds, a great book which I am very pleased to be assisting in promoting today, he says:

… the United Kingdom, facing a much tougher fiscal situation than Australia's, cut its company tax rate to 23 per cent in April 2013, to be reduced further to 21 per cent in April 2014.

So here is Chris Bowen saying that, despite the deficit that the UK has, it has proceeded with company tax cuts, and that was the right thing to do. I entirely agree, but again I hate to point out that Senator Watt is out of step with his colleagues on this issue.

I thought, when I was contemplating my contribution to this debate this morning, that I should revisit the Henry tax review because it is the most recent and most comprehensive review of our taxation system. It was done under the former government, and it was done by a person that I do not think anyone in this chamber would suggest is a neoliberal or an advocate of trickle-down economics. I stand to be corrected, but somehow I doubt that. There are a number of interesting aspects of the Henry tax review on the issue of company tax, which I commend to all senators who are considering how they will vote on this bill later this week.

The first is that the Henry tax review very powerfully demonstrated how out of step Australia's company tax rate is with the rest of the world. They were doing so in May 2010. The data that they used—and this is on page 39 of the report—was from 2009. Things have moved on since 2009, and I will update the Senate on just how they have moved on. But, in 2009, these were the OECD countries that had a lower corporate tax rate than Australia: the United Kingdom, Italy, Spain, New Zealand, Luxembourg, Norway, Mexico, Portugal, Sweden, Finland, the Netherlands, Greece, Denmark, Austria, Korea, Switzerland, Turkey, Hungary, the Czech Republic, the Slovak Republic, Poland, Iceland and Ireland. That was in 2009. The handful of countries in the OECD that had a higher corporate tax rate than Australia in those years was Germany, France, the United States and Japan.

Already, Ken Henry and his review were concerned that Australia was becoming out of step with the rest of the world on corporate tax. But what has happened since should give everyone in this chamber cause for much greater concern, because very many of those countries I just listed, including both those who already had a lower corporate tax rate than us and those who had a higher tax rate than us, have since further reduced their company tax rates. They have cut their company tax rates further. So Australia is becoming even more out of step with the OECD. Our company tax is becoming even less competitive.

It is likely that it will become less competitive still, particularly if President Donald Trump is successful in his plan to reduce the United States corporate tax rate down to 15 per cent, as he has promised to do, and if Germany follows suit, as it has promised to do if Trump is successful, and if the UK continues to cut its corporate tax rate as a way of ensuring that it remains competitive after its exit from the European Union, as Theresa May, the Prime Minister, has flagged it will do. Australia was already dangerously out of step in 2009, and we have become only more so since. Our international position and competitiveness have been eroded even further from what worried Ken Henry so much in 2009.

I will quote directly from the report now—and again I remind senators that this is Ken Henry's report, under a Labor government. He said:

Australia should respond to these developments by reducing the company income tax rate to 25 per cent over the short to medium term …

Presumably, the short to medium term from 2009 is right about now. He goes on to say:

This would ensure that Australia remains an attractive place to invest…

…   …   …

Reducing taxes on investment, particularly company income tax, would also encourage innovation and entrepreneurial activity. Such reforms would increase income for Australians by building a larger and more productive capital stock, and by generating technology and knowledge spillovers that boost the productivity of Australian businesses. A lower company income tax rate would also reduce incentives for foreign multinationals to shift profits out of Australia.

Again, that is in the words of Ken Henry.

One of the reasons why the government are proposing this reform is that we know that the benefits of a lower corporate tax rate will flow through to workers' wages and income. We know that reducing the company tax rate, which will increase investment in and the profitability of Australian companies, will ultimately and decisively benefit Australian workers. This is something which has been studied widely. The Tax Foundation in the United States, for example, found:

Wages rise $2.50 for every $1 reduction in state and local corporate income taxes.

Treasury modelling predicts that the enterprise tax plan will increase gross national income by up to 0.8 per cent and wages after tax by more than one per cent. One study estimated that a 10 percentage point increase in the corporate tax rate would decrease annual gross wages by seven per cent, with a similar impact on low- and high-skilled workers.

Over time, the amount of capital investment in Australia is reduced by an uncompetitive business tax rate. This is particularly important as the tax rates of our competitors and our sources of foreign direct investment reduce. Our largest foreign direct investor, the United States, today has a company tax rate which is higher than ours, but, as I have said, it has a plan to reduce it. If they do, we may see a sharp reduction in the flow of investment from them, our largest source of foreign direct investment, and that would have very serious consequences for the wages of Australian workers. This is something that Andrew Leigh, the shadow Assistant Treasurer, has acknowledged, saying that there is a strong link between the company tax rate and wages. He has quoted studies which estimate that an increase in company tax by 10 percentage points would lead to a fall in wages by six to 10 per cent.

An important thing to bear in mind is that the benefits of reducing the company tax rate will be permanent and long lasting for the Australian economy. It is something which we will reap the benefits of, going forward. This is not just a one-off sugar hit, like the stimulus packages put in place by those opposite that we are still paying for today. This is a permanent improvement to Australia's competitiveness and productivity that will deliver dividends for decades to come.

Treasury modelling shows that a five per cent reduction in business tax will deliver a permanent boost to the economy of about one per cent over the long run, as I mentioned. Australian modelling predicts that reducing the company tax rate from 30 per cent to 25 per cent would result in a permanent increase in business investment of up to 2.9 per cent over a similar period, which is equivalent to about $6.5 billion in today's dollars. By comparison, the highly successful reforms—revered by all sides of politics and by economists—preceded by the Hilmer report in the 1990s delivered about a 2.5 per cent boost to the economy. So, when those opposite talk about the economic reform legacy of Keating, as they should and are entitled to do, and they talk about the benefits delivered by the competition reforms, which were very real and very positive, they should bear in mind that they delivered a smaller boost to the economy than this tax cut for businesses will.

In the United States, it has been estimated that a one per cent cut in local business taxes can increase the number of local establishments by about three to four per cent over a 10-year period. The OECD has found that corporate income taxes are the most harmful major tax when it comes to economic growth. UK modelling predicted that reducing the tax rate from 28 per cent to 20 per cent would result in a permanent increase in investment of up to 4.5 per cent over a 20-year period.

That reminds me of another key finding of the Henry tax review. This is on page 13 of the report, in the chapter entitled 'The need for reform', which I think is even more prescient today than it was in 2009. The Treasury ranked taxes by the marginal welfare loss generated by increasing those taxes, and this is a common method to determine which taxes have the least deadweight loss on the economy and which taxes therefore can raise revenue with the least negative impact on welfare. They ranked these from the greatest loss in welfare to the lowest loss in welfare. The first three taxes are state based taxes, which obviously we do not have direct control over. They were the royalties and crude oil excise, insurance taxes and payroll tax. They are the ones that have potentially the most negative effect on welfare. But the next, fourth most harmful tax from the point of view of the welfare of the Australian people—and it is by far the most damaging tax at the federal level—is corporate income tax.

It is no accident that Ken Henry was recommending primarily, among all the other recommendations he made, a reduction of the company income tax rate—because it is a tax under the direct control of the federal government and it is the tax that has the most damaging impact on our economy.

I spoke before about the fact that a cut to company tax rates will be permanent and long lasting, but the other important thing is that the impact will be immediate. It will have an immediate impact on our economy and give an immediate boost not just to small businesses—who, under our plan, will take advantage immediately of a reduction in tax rates, and that is a very important aspect of the plan—but also to medium and larger sized businesses, who, if this full package is legislated, will have confidence that the investments they make today, which have a long lead time and which may not return a profit for many years, will be returned in a favourable tax environment. That will encourage them to make those investments today.

One of the most important things we can do is deliver certainty to those businesses that there will be a good economic return on their investment in the years to come. So, even if we cut their taxes today through legislation but the effect does not happen for many years, we can expect to see an immediate improvement in business investment. Today those companies are sitting around, watching what we are doing and deciding whether or not to invest, and there is no way that they are going to invest until they see action by this parliament to demonstrate that they should invest.

So, if we are worried, as we all should be, about the declining rates, the low rates, of investment in Australia, and the impact that that has on the take-home pay of workers and on the returns for retirees in their retirement, then the best thing we can do is not just pass part of this package but pass every bit of this package today to deliver instant benefits to small business and long-term benefits to the country.