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Would a corporate tax cut boost productivity in Australia?

The first term of the Albanese government was defined by its fight against inflation, but the second looks like it will be defined by a need to kick start Australia’s sluggish productivity growth.

Productivity is essentially the art of earning more while working less and is critical for driving our standard of living higher.

The Productivity Commission, tasked with figuring out how to get Australia’s sluggish productivity back on track, is pushing for corporate tax changes as a key part of their plan for building a “dynamic and resilient economy”.

The idea? Lower taxes will attract more foreign investment, get businesses spending again and eventually boost workers’ productivity.

Commission chair, Danielle Wood, said last week while the commission wanted to create more investment opportunities, it was aware this would hit the budget bottom line:

"So we’re looking at ways to spur investment while finding other ways we might be able to pick up revenue in the system"

The general company tax rate is currently 30% for large firms, and there’s a reduced rate of 25% for smaller companies with an overall turnover of less than A$50 million.

What the textbooks and other countries tell us

The Productivity Commission’s theory makes sense: if you make capital cheaper and you should get more of it flowing in.

A larger stock of capital means there is more to invest in Australian workers. This should make us more productive and help boost workers’ wages. And looking overseas, the evidence mostly backs this up.

A meta-analysis of 25 studies covering the US, UK, Japan, France, Germany, Canada, Netherlands, Sweden, Italy, Switzerland, Denmark, Portugal and Finland found every percentage point you slice off the corporate tax rate brings in about 3.3% more foreign direct investment.

Other research shows multinational companies really do move their operations to places with lower tax rates. This explains why we’re seeing this race to the bottom across Europe and North America, with countries constantly trying to undercut each other.

Research on location decisions shows how multinationals reshuffle their operations based on effective average tax rates.

Even within the United States, a US study found increases in corporate tax rates lead to big reductions in employment and wage income. However, corporate tax cuts can boost economic activity – though typically only if they are implemented during recessions.

Australia’s limited track record

Here in Australia we don’t have much local evidence to go on, and what we do have is pretty puzzling.

This matters because Australia’s corporate tax system has some unique features that may make overseas evidence less relevant. We have dividend imputation (franking credits), different treatment of capital gains, access to immediate reimbursement for some small business expenses and complex capitalisation rules that limit debt deductions for multinationals.

A study by a group of Australian National University economists looked at how the tax system affects business investment. They examined the [2015 and 2016 corporate tax cuts] for small businesses using data on business investment from the Australian Bureau of Statistics combined with tax data from the Australian Tax Office.

The findings were mixed. After the 2015 cut, firms already investing in buildings and equipment spent more — that is, the policy boosted investment only at the intensive margin.

By contrast, there was no evidence it enticed firms that had not been investing to start doing so. The follow-up cut in 2016 had even less bite. Its estimated effect on investment was so small it is statistically indistinguishable from zero.

It remains unclear why the previous corporate tax reductions largely failed to produce a measurable increase in investment. Perhaps the tax cut itself was simply too modest. Or the available data was too volatile to capture its effects.

But it runs contrary to what economic theory tells us to expect. This should give us pause for thought.

The big questions nobody can answer yet

For politicians thinking about another round of corporate tax cuts, this creates an uncomfortable situation. We’ve got solid evidence from overseas it works, but only one weak data point from Australia, plus a lot of head-scratching about why the second cut didn’t move the dial.

Fortunately, the Productivity Commission has the in-house expertise to further investigate this question.

Before we make further cuts to the company tax rate, we should have an in-depth study of these two tax cuts replicating and extending the previous work to see what effect – if any – they had on investment, employment, productivity and Australian living standards.

Until we can solve these puzzles, Australia’s debate over corporate tax rates will keep spinning its wheels. Much like our national productivity itself.The Conversation

The Conversation

 

Isaac Gross, Lecturer in Economics, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

 

12 Comments
davidy
June 29, 2025

So the top personal marginal rate is 47% and the maximum discounted capital gain tax is 23.5%, and you then want to reduce the corporate date from 30% ?

Come on, so who/how do you ever balance out budget ?

CC
June 30, 2025

it's actually 48.5% when you take into account the Medicare levy surcharge on higher income earners who don't take out expensive private health insurance.
an outrageous amount of personal income tax

John
June 27, 2025

"Lower taxes will attract more foreign investment"
Why do we need foreign investment when we have a ever increasing supply of superannuation money looking for a home.

Johns
June 27, 2025

With our unique imputation system, effectively our corporate tax rate is zero. You cant get any lower. So what is the complaints about?

John
June 27, 2025

I am not sure what you are getting at. Companies will pay 30 or 25 % on retained profits and send the equivalent amount as franking credit to ATO on dividends paid

Jon Kalkman
June 27, 2025

Our imputation system means that Australian shareholders always pay tax on company profits at their marginal tax rate. Those on high marginal rates can use that tax credit to pay some of their tax on that grossed-up income but they pay more tax (47%) on their share of the company’s profits than the company did (30%). That is not zero.
Foreign investors pay tax on Australian company profits at the company tax rate, because it is extracted before they get the dividend.

Lowering the company tax rate would make no difference to Australian investors because they would continue to pay tax on their share of company profits at their marginal rate but it would be beneficial to foreign investors. How much reduction is needed to be an incentive to increase foreign investment is unclear.
It would make a significant difference to Australian companies, because they would have more after-tax profit to deploy in further investment.

Billy
June 29, 2025

Can I simply ask why would you cut company tax rate when the only people to benefit from it would be foreign investors?

My approach, if the government needs a certain amount of money to run the country, the more they get from foreign investors the less they need from Australians. Tax the foreign investors more because it's less I have to pay.

Our superannuation guarantee will give funds for Australian companies we are always hearing that super funds have cash to invest and one of the reasons they invest overseas (there are others) is because they don't have enough opportunities in Australia.

Higher company tax will encourage higher dividend payout ratios, but that's fine,. People say that companies should retain profits for internal investment. If a company is a a great investment they will have no problems raising additional capital via a rights issue. If there are better investments then the shareholder can decide. That's how it should be

kerry
June 26, 2025

One basic cause of low productivity: a lot of people being paid to do nothing due to poor management and lack of accountability. One colleague grossly lazy, another uninterested to the point of negligent performance. Neither can be dismissed or sanctioned in any way because of inappropriate industrial relations laws and union solicitors happy to obfuscate and defend the indefensible. Answer-pay outside consultants exorbitant rate to do the work.
Not to mention, bored, unnecessary "traffic controllers" [even on a footpath repair today]. Council workers not working an everyday event. Multiply across the public sector.

GeorgeB
June 29, 2025

What are the chances of labor govts doing anything about union bad behavior no matter the consequences for productivity?

Steve
June 26, 2025

Yeah. Nah. You only pay tax on your profit. Making a profit is the hard part. High energy costs, high labour costs, high capital project costs all add up to less profit. The competition for labour from bloated govt infrastructure spending has pushed the costs for all employers higher. Everyone knows our manufacturing base is shrinking. This exercise is just moving the deck chairs. Add the disdain for anyone making a profit from our socialist governments and you have buckleys.

Corrie
June 27, 2025

Steve, well explained! I could not do it any better! Our politician don`t get it!

GV
June 28, 2025

You've hit the nail on the head Steve. You have gotta spend a lot to make a lot of profit. Private enterprise 101. The socialists don't see it that way, as they want to spend more (and then more) from the money you make.

 

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