A wise tax cut that won't happen

Once again, a tax review has suggested a cut to company tax in order to spread the benefits of the mining boom. And once again, this pragmatic plan will fail to clear the political hurdles.

SmartCompany

Reading the Business Tax Working Group’s report on ideas for cutting the company tax rate, I was struck by a sense of familiarity.

An explanation of the benefits of cutting the company tax rate to 25 per cent... an examination of some of the more industry-specific tax breaks contained in our system… a discussion on the way R&D tax breaks work… I felt I’d read it all before somewhere.

Then it struck me. The Henry Tax Review! That two-year, in-depth blueprint for holistic tax reform, compiled by former Treasury Secretary Ken Henry and handed to the Federal Government in May 2010.

This monster bit of work – which was really very impressive in its size and scope and covered a lot of the same territory as the Business Tax Working Group’s report – was largely ignored by the government, which is still to release any of the modelling Henry conducted in the compilation of his report.

Ken Henry saw most of his hard work go to waste. You get the feeling Chris Jordan, head of the BTWG, is about to see the same thing.

It’s hardly surprising that there are similarities between the Henry report and the BTWG discussion paper. It’s actually quite nice, as it brings the idea of a cut to the corporate tax rate back to where it started.

It was on the day of the release of the Henry review that Treasurer Wayne Swan unveiled his mining tax and declared that the company tax rate would be cut to help redistribute the spoils of the mining boom throughout the economy.

The mining tax was reworked and so was the company tax cut, which was eventually sacrificed on the altar of Swan’s budget surplus in May this year.

After businesses rounded on the government over what it saw as a broken promise, Swan and Prime Minister Julia Gillard declared that cutting the company tax rate was still a top priority. Except the money set aside had been spent, and the BTWG needed to come up with tax measures to cut to try and find the reduction in the corporate tax rate.

And so the BTWG completed the circle, going back to cover the same ground as poor old Ken Henry.

But where Henry got praise from much of the business community for his impressive review, Chris Jordan is unlikely to get a great reception.

I’d be willing to bet we don’t see company tax cuts in the life of this government, for a company of reasons.

First is the predictable business reaction.

Jordan’s discussion paper suggests three broad areas of tax breaks to cut: interest deductions, depreciation deductions and some R&D incentives. Some proposals would affect a large number of sectors, some focus on specific industries, such as mining, property and manufacturing.

The problem, of course, is that participants in those specific industries will protest long and loud at the idea they will have one of their tax breaks taken away to pay for a company tax cut. Indeed, business is already bristling – as it always does – that it should lose any tax breaks to pay for a company tax cut that was promised to them and, up until May, was supposedly fully funded.

Will the government want to antagonise business before next year’s election? It might be easier to just reach for the "too hard” basket.

The second reason is the political climate.

The Greens blocked the previous company tax cut legislation on the grounds that they did not want big business to get a tax cut. Even if the government can get business to agree to some sort of trade-off, why will the Greens change their stance?

The third reason is timing.

The BTWG now want to take submissions from industry on its discussion paper and then get a final report to Swan in December. After the Christmas shutdown, we’re unlikely to get a response from the government before February or March, which doesn’t leave much time before the May budget to get any changes in place. And after the budget, an election looms.

It won’t be a surprise if time just gets away from Swan on this one.

James Thomson is a former editor of BRW’s Rich 200 and the publisher of SmartCompany and LeadingCompany.