Why Labor's investment guarantee plan trumps tax cuts

Ever since the Turnbull government announced its plan to cut the company tax rate and Labor pledged to oppose it for larger companies, business organisations have been calling on the opposition to come up with an alternative. On Tuesday, Labor did just that.

Last Monday night, Prime Minister Malcolm Turnbull claimed the Shorten opposition had not proposed one policy to encourage one dollar of investment to create one job. Labor's plan for a permanent investment allowance in the form of its 'Investment Guarantee' is such a policy. But unlike a company tax rate cut, it targets investment directly. If you don't invest you don't get the Investment Guarantee, but if you don't invest you still get the Coalition's company tax rate cut.

That's the difference: the company tax rate cut is given on a wing and a prayer that it might encourage investment instead of being used for share buybacks to increase the share price (and hence, CEO remuneration) or for dividends to shareholders, whereas the Investment Guarantee is totally conditional on new investment.

When we seek to encourage R&D we implement an R&D tax concession rather than cutting the company tax rate. When we seek to encourage investment, we sensibly should implement an investment allowance. This is the argument I have previously made  on these pages: ('There is a growth alternative to cutting company taxes', and  'Investment allowances are better growth plan than company tax cuts').

The government's claim that only the company tax rate matters is an assertion that global CEOs are too dim to understand the difference between the rate and base of a tax.

Government ministers nostalgically refer to the Hawke-Keating cuts to the company tax rate as a compelling reason why the Shorten Labor opposition should support the Coalition's proposed rate cut. They neglect to mention that Hawke and Keating practised the philosophy of broadening the base to lower the rate. Nor do they acknowledge that their Coalition forebears vehemently opposed any broadening of the company tax base – just as the Coalition incumbents do now. Hawke and Keating prevailed despite them, not because of them.

An investment allowance, like a company tax rate cut, increases the after-tax rate of return on investment, making new investments more attractive. But unlike a company tax rate cut, an investment allowance does not confer a windfall gain to foreign shareholders on the income streams from past investments. That windfall gain comes at a heavy cost to the budget bottom line.

The budget repair task cannot be suspended simply because the hit to the budget bottom line is from a windfall gain to foreign shareholders. It is important that the bulk of the proceeds from Labor's policy of withdrawing dividend imputation refunds are used for budget repair and the investment allowance. Otherwise Shorten's Labor will successfully be tagged as a high-taxing, high-spending party.

Cash refunds for dividend imputation were not part of the Keating imputation system. The Howard-Costello government introduced them in 2000 as a sweetener for self-funded retirees who would be adversely affected by their stated plan to tax family trusts as companies.

In the event, Howard buckled under pressure from the National Party and reneged on Costello's signed agreement with shadow treasurer, Simon Crean, to tax trusts as companies. But he and Costello kept the sweetener anyway. At that time, the sweetener was costed at around $550 million per annum. It now costs more than $5 billion annually and is heading towards an $8 billion annual drain on the budget.

If the investment allowance were temporary, it would likely bring forward some investment but might not much increase total investment in the medium term. But by permanently increasing the after-tax rate of return on new investments, the investment allowance makes all investments more attractive and will lift aggregate investment.

The Labor investment allowance would be available from 2020, whereas the Coalition's company tax rate cut for multinational corporations would not become fully operational until late next decade. It's easy to work out which would provide a timely, cost-effective incentive for new investment.

Source: http://www.afr.com/opinion/columnists/why-...