Company tax needs slow reform, not quick fix - Smith

A KEY member of the Henry tax review has rounded on business lobbyists for calling for a cut in the company tax rate and says the government was right not to cut it and that it is wrong to say the review wanted it to.

By InvestSMART · 19 Jun 2012

By InvestSMART ·
19 Jun 2012

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"I advocated a cut in the company tax rate when I signed the Henry report," the former Treasury deputy secretary, Greg Smith, told a Committee for Economic Development of Australia function yesterday.

"But that was, from our point of view, a 10- or a 20-year reform. We certainly didn't see it as an immediate thing. And I certainly also imagined it would only occur in the context of a significant increase in rent taxes.

"We're not going to get that. With tax reform you've got to look at the whole, and once you fail on one front, what's desirable and the timing of what you do on another front has to change. I think the government is right to go slow on company tax."

Mr Smith was particularly scathing of calls by the Business Council and others for even more investment in Australia. "We already have the highest investment rate in the developed world. The idea that we can increase it in the next five years is ridiculous, completely absurd.

"We can try to restructure it and we should. We do infrastructure in the wrong places we do the wrong things. But we are not going to get a higher share of GDP [gross domestic product] higher than 29 to 30 per cent without enormous trouble.

"If you tried to go to 35 to 40 per cent, all that would happen is that you would see interest rates and other adjustments creating further problems in order to offset the inflationary and other macroeconomic problems that such an investment level would bring."

Australia's biggest problem was its changing demography, not a lack of investment. Life expectancy was advancing by a year every decade and yet the superannuation system encouraged retirement at 60.

"I've been personally associated with creating the superannuation industry in this country," Mr Smith said, referring to his role as an adviser to the then treasurer, Paul Keating, in the 1980s.

"I don't feel very proud about that. I think it's an achievement, yes, but it's not the answer.

"We cannot have retirement going for 25, 30 years. That's why the Henry Review wanted to get the preservation age of super up from 60.

"Super is basically an early retirement system. It is not dealing with the very high costs of aged care and health in late retirement."

The planned increase in compulsory superannuation contributions was set to cost more in tax concessions than it would save by taking retirees off the pension.

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Frequently Asked Questions about this Article…

What did Greg Smith say about cutting the company tax rate and the Henry tax review?

Greg Smith, a former Treasury deputy and signatory of the Henry review, said he personally advocated a cut in the company tax rate but only as a long-term reform over 10 to 20 years. He argued the review did not support an immediate cut and that any reduction should occur alongside significant increases in other measures such as rent taxes.

Should everyday investors expect an immediate company tax cut?

According to the article, the government is right to go slow on company tax. Smith stressed a company tax reduction was never intended as an immediate fix and would be a long-term reform that depends on broader tax changes.

How does the Henry review’s view on company tax differ from business lobbyists’ calls?

Smith criticised business lobbyists who pushed for an immediate company tax cut, saying the Henry review did not call for a near-term reduction. He emphasised the review saw any cut as part of a long-term package of tax reforms, not a quick fix.

Is Australia’s investment level a problem for investors?

Smith said Australia already has one of the highest investment rates in the developed world, and the idea of substantially increasing investment share of GDP in the next five years is unrealistic. He warned that pushing investment too high could create inflationary pressures and lead to higher interest rates, which investors should watch.

What did Smith say about the quality and allocation of investment and infrastructure?

He suggested the issue is less about more investment and more about restructuring and doing infrastructure in the right places. Improving how investment is allocated can be more important than simply increasing its total level.

How does Australia’s changing demography affect investors and retirement policy?

Smith identified changing demography—longer life expectancy—as Australia’s biggest problem. With people living longer while the system encourages retirement at age 60, this creates sustainability pressures for superannuation and public finances that investors and retirees should be aware of.

What did the Henry Review recommend about the superannuation preservation age?

The Henry Review recommended raising the preservation age for superannuation above 60. Smith said this was to address the problem of people retiring earlier while living longer, which strains retirement systems and aged-care costs.

Will increasing compulsory super contributions reduce pension costs for taxpayers?

The article notes the planned increase in compulsory super contributions was expected to cost more in tax concessions than it would save by removing retirees from the pension. Smith also pointed out that superannuation acts as an early-retirement system and does not solve high aged-care and late-retirement health costs.