In optimisation theory, it's called a non-feasible solution space: the tax reform debate is imposing so many binding constraints on an acceptable package that none are achievable.
From the hard right, the edict is that tax reform must achieve lower overall levels of taxation – despite a yawning budget deficit that is widening with every downward revision of forecast economic growth, wages growth and iron ore prices.
From the broad left, any reform proposal must not include changes to the GST – despite rising health costs in an ageing population and the need to fund the socially desirable needs-based school-funding system.
From the wealthy, perks such as tax concessions for high-end superannuation, capital gains and residential property investments must remain sacrosanct – since apparently they mainly benefit not the wealthy but poor renters and middle-income earners.
Yougawalla Station in Western Australia's Kimberley region is expected to attract foreign bidders who will have to undergo Foreign Investment Review Board scrutiny. Rob Homer
Mystical powers are being vested in a GST rise in an effort to get it over the line. Purportedly it can fund compensation for the poor, the handing back of bracket creep, increased funding for health and education, the abolition of inefficient state taxes and a cut in the company tax rate.
The magic claimed for a GST rise lies in the improvement in incentives to work, save and invest that a corresponding reduction in marginal rates of personal tax and in the company tax rate would ostensibly unleash. Corporate Australia, it is asserted, would respond to a lower company tax rate with an investment surge that lifted all boats and all passengers.
Yet Australia's economic opportunities after the mining boom lie mainly in service industries that do not require large capital investments. Indeed, disruptive technologies – an essential source of much-needed productivity growth – typically make better use of existing capital such as housing and motor vehicles. One industry in which extra foreign investment could make a big difference is agriculture.
But the government is sending the wrong signals to Chinese, Japanese and Korean investors by legislating to reduce the Foreign Investment Review Board screening threshold for their private agricultural investments, and by rejecting a proposal to sell the Kidman cattle stations to overseas buyers.
As shadow assistant treasurer Dr Andrew Leigh has pointed out, Australia's company tax rate is not high by developed-country standards. After years of quantitative easing and near-zero interest rates, the world is awash with investable capital.
HURDLES TOO HIGH
Rather than Australia's company tax rate preventing project proposals from achieving required hurdle rates, the problem appears to be that those hurdle rates are too high to jump for most investments outside industries protected by large barriers to entry.
Insipid productivity growth in developed and emerging economies suggests the high real project returns of about 6-8 per cent required by boards are not widely available.
What happens, then, if the government cuts the company tax rate to 25 per cent and investment fails to respond? One scenario is a further deterioration in the budget deficit, risking Australia's triple-A credit rating, forcing up interest rates on foreign debt and stifling investment.
If increased investment were the purpose of a company tax rate cut, a more efficient policy would be to target investment directly rather than company income generally.
Eligible new investment could be subject to an investment allowance permitting companies to write off more than 100 per cent capital expenditure, just as the R&D tax concession does, or by offering accelerated depreciation, possibly even immediate expensing of capital assets.
Sceptics have questioned the effectiveness of such allowances in boosting overall investment levels. They might be right. But if they are, they must logically also question the effectiveness of the much more costly instrument of a general company tax rate cut.
Like other tax proposals, a company tax rate reduction should not be taken off the table. But its effects should be analysed rigorously in the real world, rather than in the imaginary world of perfectly competitive capital and labour markets.
Why the states – which can veto any change in the GST – would agree to the diversion of the extra GST revenue to the Commonwealth to fund a company tax rate cut remains a mystery.
A company tax rate reduction part-funded by repairing the company tax base through prospectively removing unwarranted concessions such as unrestricted negative gearing and the 50 per cent capital gains tax discount might be a different matter.
In the meantime, the responsiveness of corporate Australia to an investment allowance could be tested through its early implementation as part of a tax reform down payment.
Craig Emerson is the chief executive of Craig Emerson Economics and an adjunct professor at Victoria University's College of Business.