Corporate Australia is throwing its weight behind a proposal to raise the Goods and Services Tax (GST) to 15%. The plan would see GST, currently at 10%, broaden its base to include education and health services. The GST hike would offset a cut to both corporate and personal taxes under the proposal.
Businesses often complain about punishing corporate taxes. They claim it prevents them from investing in new projects and people. And they use this argument to explain the economy’s present sluggishness.
Corporate Australia presently pays a flat tax rate of 30%. That’s lower than the US, where companies pay a 35% tax rate. But it’s significantly higher than the UK’s 20% corporate tax rate.
The fact that businesses want lower taxes is nothing new. But let’s look beyond that for a moment.
Does this proposal make sense for the economy?
Commonwealth Bank’s CEO, Ian Narev, thinks so. Here’s his take on it:
‘It’s clear that cutting personal and corporate tax rates and funding those by an increase in the GST would stimulate business investment. Now there is no doubt the combination of an increase in GST and a reduction in corporate tax, from the point of view of how it looks to stimulate business investment would be a net positive thing’.
Mr Narev stops short of endorsing the proposal outright. But he is supportive of the Business Council of Australia’s (BCA) stance of tax reform. In addition to the changes mentioned, the BCA wants inefficient state taxes abolished too.
But the key takeaway from Mr Narev’s comments is the question of investments. There is a belief that lower taxes automatically equal higher investment. That’s sounds logical enough, right?
Lower taxes should help stimulate business spending, as businesses would have more money to spend. That, in turn, should lift productivity and competitiveness. The net effect should benefits the economy as businesses invest more money.
It’s a nice idea — in theory. But is that really what’d happen? I think it’s a stretch to expect too much from corporate Australia. They can promise spending, but they’re not doing a good job in delivering of late.
Corporate investments fall due to high expectations
Right now, businesses are reluctant to spend. In the 2015–16 financial year, its expected business investment will drop by a staggering $104 billion. Both mining and non-mining sectors forecast a dip in spending.
Corporate Australia might argue that excessive corporate taxes prevent them investing. But they’d be disputing evidence, straight from the Reserve Bank, stating otherwise.
The RBA recently indicated that businesses weren’t spending because of lower returns on investments. This is more commonly referred to as the ‘hurdle rate’.
The problem, to put it bluntly, is that corporate Australia is stingy.
Businesses are sticking by hurdle rates of 10%, despite favourable conditions for investing. That’d be reasonable in an era of higher interest rates. But the cash rate, at 2%, is at its lowest level on record. Yet companies aren’t adjusting their expectations in line with lower rates. They’re still rooted in the mindset of high returns, set when interest rates were over 7%.
These high hurdle rates raise questions about the potential benefits of lower corporate taxes. If businesses aren’t investing because hurdle rates aren’t up to scruff, what would change with lower corporate taxes? We’re just as likely to end up with lower corporate taxes, but little change in investments.
There’s a fear that businesses will use these extra funds to boost their reserves. And there’s really nothing stopping them from banking the difference. You can picture it now: low corporate taxes go towards supporting balance sheets and dividend payouts. It’s a scenario as likely, if not more, than any resultant surge in investments.
A GST rise boosts government coffers too
We’ve looked at what a GST rate hike — and corporate tax reduction — does for Aussie businesses. But what would a 15% GST mean for the rest of us?
The first thing to note is that it’d improve the government’s bottom line drastically. Modelling by tax consultancy KPMG suggests it’d amount to a $42 billion rise in tax revenues. A broadening of the GST base would help reach this figure. And it means health, education and fresh food would all be included as part of the tax.
$42 billion is a lot of money though. It effectively amounts to the current budget deficit. Supporters of the reform say the government could spend the extra tax revenue on those affected by a higher GST. How much of this money would find its way into the hands of these people is anyone’s guess.
Remember the government would still need to offset the drop in corporate and personal taxes. It’d never support a measure that worsens its bottom line. With a budget deficit to think about, the government would surely find a way to take more than its fair share.
Those most affected by the GST rise could find themselves with a lower standard of living.
The bottom line is that corporate Australia should start investing now. It has the means to do so, even if it’s crying foul about taxes. Calling for a cut in corporate taxes, at the expense of the neediest Australians, is unfair.
Businesses need to show they’re ready to lift spending before any GST increase. That might make their argument more credible.
Contributor, The Daily Reckoning
PS: Corporate tax cuts would be a major boost to stock listed companies. With the ASX looking shaky, it’d come as a timely boost to flagging stocks.
But the long-term future of the ASX remains up in the air. Things could get much worse, and it might leave no sector untouched.
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