Thu Jul 31

The company tax regime is a roadblock to business investment. Here’s what needs to change

Written by: Alex Robson, Deputy Chair, Productivity Commission, and Adjunct Professor, Queensland University of Technology

Productivity growth is a key driver of improvements in living standards. But in Australia over the last decade, output per hour worked grew by less than a quarter ^[1] of its 60-year average.

We urgently need to turn this around.

That’s why the government has asked the Productivity Commission – where I am deputy chair – to conduct five inquiries ^[2] and identify priority reforms.

As a first step to boost productivity growth, we need business to expand and invest in the tools and technology that help us get the most out of our work.

Unfortunately, some of our most important policy settings are holding us back.

Business investment has slumped

Capital expenditure by all non-mining firms is down 3.2 percentage points ^[3] as a share of the economy since the end of the global financial crisis in 2009.

And the ever-growing thicket of rules and regulations faced by business is a significant handbrake on growth.

The Productivity Commission’s first interim report, Creating a more dynamic and resilient economy ^[4], focuses on two big policy levers: tax and regulation.

Lower company tax rates are likely to attract more overseas firms ^[5] to invest in Australia and help people start and grow businesses. They may strengthen the ability of smaller firms, which contribute the bulk of capital investment, to compete with larger ones.

Our draft recommendations include:

Cutting the company tax rate to 20% from 25% or 30% for businesses with revenue under A$1 billion – the vast majority of companies
Introducing a new 5% net cash-flow tax on all firms. This supports companies’ capital expenditure by allowing them to immediately deduct the full value of their investments.

The company tax rate would remain at 30% for firms earning over $1 billion. This would affect about 500 companies.

In line with other developed nations

The reduction in Australia’s headline company tax rate would move Australia from having one of the highest ^[6] to one of the lowest rates for small and medium-sized firms among developed economies.

And if the net cashflow tax is effective, it could be expanded over time and fund broader reductions in company income tax.

Our modelling indicates these two changes would increase investment in the economy by $8 billion and boost Australia’s GDP by $14 billion, with no net cost to the budget over the medium term.

An abundance of red tape

The interim report also notes regulation can enhance productivity and protect against harms. But too much, or inappropriate, regulation can disproportionately inhibit economic dynamism and resilience.

Australia’s regulatory burden has grown. Businesses report ^[7] spending more and more on regulatory compliance.

Regulators and policymakers have a broad mandate to further the public interest. But they can face incentives to be overly risk-averse and to downplay the burden that regulations place on businesses. They may pursue narrow goals at the expense of broader economy-wide goals.

There are many practical examples that illustrate the problem.

In the Australian Capital Territory, for example, the average time a house builder must wait for a planning decision is nearly six months ^[8]. In New South Wales, it takes an average of nine years ^[9] to get approval to build a wind farm.

This kind of unnecessary and costly over-regulation ultimately benefits nobody.

More scrutiny needed

Simply put: Australia’s regulatory culture needs to change. And cultural change starts at the top.

As a first step, the government needs to make a clear, whole-of-government public commitment to reducing regulatory burdens, and ensure new regulatory proposals face greater cabinet and parliamentary scrutiny.

Regulators need to look for ways to promote economic growth, while continuing to ensure Australians are protected against avoidable harms.

Ministers could issue statements of expectations to regulators and regulatory policymakers that clearly indicate how much risk they should tolerate in pursuit of business dynamism.

To improve the evaluation of cumulative regulatory burdens, the Productivity Commission should be tasked with a regular and systematic stream of reviews. These would focus on sectors or regulatory systems where complex and enduring thickets of regulation have emerged.

The draft recommendations ^[10] on tax and regulation set out in the interim report are clear, actionable and ambitious reforms. They will support governments in delivering a meaningful and measurable boost to Australia’s lagging productivity.