The transactional politics of a company tax cut

Is there a better alternative to a company tax rate cut, Australia's major business organisations asked in yesterday's feature in the Fin Review. Well, yes there is – an investment allowance. On no less than four occasions in these pages have I proposed an investment allowance, most recently on Tuesday. The unwillingness of major business groups even to acknowledge the existence of the investment allowance alternative suggests they are not interested in debate, only in having their favourite policy legislated.

A company tax rate cut offers a $40+ billion retrospective gift to multinationals on the income streams from investments they have already made at the 30 per cent rate. An investment allowance, by applying only to future investments, not past ones, does not. When governments seek to boost R&D they offer an R&D tax concession, not a general company tax rate cut. When they seek to boost investment, they should offer an investment allowance and not squander tens of billions of dollars on a retrospective gift to multinationals.

It is deeply concerning that election campaigns are becoming transactional: we'll back your party if you promise us money. Of course, it's never presented to the public that way. No, it's always the workers or the poor who benefit, according to sophisticated economic modelling. In this case, business groups cite private modelling claiming that Australia would gain $2.39 for each $1 reduction in company tax. Never mind that the modelling assumes that for each $1 in company tax reduction, the nice multinationals will hand back to the Australian Taxation Office a 73¢ Morality Dividend by easing back on their nefarious profit-shifting activities. How sweet. If it's feasible at a 30 per cent company tax rate to shift profits to tax havens where the tax rate is zero, it's still feasible – and profitable – to do so at a 25 per cent rate.

From the days of the Asprey committee in the mid-1970s to the Keating reforms of the mid-1980s, the economic philosophy has been to broaden the base and lower the rates. Keating's company tax rate cut was financed by the introduction of a capital gains tax and fringe benefits tax to broaden the income tax base. But today's business organisations are demanding a lower rate while offering up no base-broadening proposals. They were given the opportunity to do so in 2012 but after months of deliberations, came up with nothing.

Instead, they are content to see the funds being diverted from needs-based school funding. Two leaders of these business organisations have spoken to me disparagingly about the Gonski reforms. They view a company tax rate cut as a long-term investment but do not see the merit of investing in struggling school kids. Then they wonder why kids in disadvantaged communities take drugs, join street gangs and participate in organised crime. Do they want Australia to go the way of the United States – which has the highest incarceration rates in the world? Locking up kids, throwing away the key and living in gated communities is not the future most Australians want to see.

In conversations with business leaders, I am told we should let the company tax rate cut do its work and then look at funding the Gonski reforms out of the proceeds of stronger growth. Even the dubious modelling they favour estimates that the growth dividend wouldn't emerge until around the mid-2030s. We should not be waiting 20 years to invest in the talents of struggling children. Isn't investing in a skilled workforce and a harmonious society in the interests of business?

It's as if the $48 billion up-front budgetary cost of the company tax cut and the ongoing cost of $8 billion do not matter. Ratings agencies do not disregard increases in budget deficits caused by business tax cuts. The Coalition's medium-term fiscal position is weak. So is Labor's short-term position. Fiscal consolidation cannot wait four more years and nor can we afford a deteriorating fiscal position thereafter.

If the business community were serious about fiscal repair and growth, it would offer up company tax base-broadening measures or support an investment allowance. That it refuses to do either suggests it is just another lobby group wanting a handout from the government in the transactional politics that is slowly destroying our democracy.