Better roads to growth than tax cuts

'Show us the modelling' has become the catchcry whenever a new policy proposal is floated in Australia. Economic modelling has a no stauncher ally than the Coalition government. In defending its company tax rate cut for all corporations, the government produced modelling and demanded the Opposition do the same for any alternative jobs-and-growth strategy it might like to unveil.

Yet when the media asked for the modelling of the recently legislated company tax rate cut for smaller businesses, the government told journalists to go down the pub. The Treasurer's ranking of beer drinking over economic modelling can readily be explained by the inevitability that such modelling would demonstrate the $24 billion cost to a budget already under extreme pressure will produce diddly-squat in jobs and growth.

An investment allowance is a far better alternative that allows company executives and workers to have a beer and create jobs and growth at the same time.

The explanation for a poor jobs-and-growth yield from the legislated company tax rate cut lies in Paul Keating's 1985 decision to introduce dividend imputation for Australian shareholders. Keating removed the double taxation of dividends – first through company tax and second when dividends from company profits were distributed to shareholders – by making company tax a pre-payment of personal tax.

It follows that, for Australians, a cut in the company tax rate just reduces the amount of pre-paid personal tax, correspondingly increasing shareholders' personal tax liabilities when they receive the distributed company profits as dividends. How the Treasury estimates the cost of this measure at $24 billion is a mystery. But if Australian shareholders are made no better off from a company tax rate cut, they are hardly likely to respond by investing more heavily.

Economic modellers agree that any benefits of company tax cuts for jobs and growth would arise from giving the tax cut to non-resident shareholders, who are not covered by the imputation system. Indeed, the government's own modelling shows that the theoretical benefits of a company tax cut come from attracting more foreign capital to enable employees to work with better plant and equipment, lifting their productivity, enabling them to gain a wage rise and, in turn, spending more on job-creating goods and services.

But that's before the costs to government revenue are counted. Some modellers come up with a small net gain in Australian incomes, others with a small net loss.

The government's proposed company tax rate cut for foreign investors would be phased in gradually from 2022. Economic modelling suggests any benefits would begin accruing in the 2030s: jobs and growth on the never-never.

In contrast, an investment allowance would have immediate effects. When we want to increase research and development, we introduce an R&D tax incentive. When we want to increase investment, why not introduce an investment incentive? Companies would be able to claim an extra, upfront deduction of, say, 20 per cent on new capital expenditure on top of the prevailing depreciation allowances.

The investment allowance could start this year and could remain in place for as long as investment remained weak. It could be tailored to particular types of investments. Maybe we don't need government subsidies for more casinos or new coal mines, for example.

Just like a company tax cut, an investment allowance increases the after-tax returns to foreign investors. But unlike a company tax rate cut, an investment allowance would not provide an expensive gift to foreign corporations in reduced tax on the income from the large stock of investments already made at the 30 per cent rate.

Nor does an investment allowance rely on the government's absurd $5 billion annual morality dividend, as multinational corporations, so grateful for the wonderful Australian government's company tax rate cut, pull back from profit shifting to tax havens. If it makes sense to shift profits to tax havens at a 30 per cent rate, it would still make sense to do so at a 25 per cent rate.

Critics claim an investment allowance would mainly bring forward investment, instead of adding to it. If that were so, we should abolish the R&D tax incentive, since the same logic would apply to it. Anyway, what's wrong with a bit of counter-cyclical policy to bring forward investment? That's what the Hawke government did, and it's what the Rudd government did to combat the Global Financial Crisis.

Depending on what moves are made overseas, an immediate investment allowance could be replaced by a general company tax cut funded by a broader base if, and when, the budget could afford it.

The Business Council of Australia has repeatedly claimed it has never seen an alternative to the proposed company tax cut. Now it has.