Divining the ripples of tax overhaul
It's no blueprint. The impact of proposals such as the cut in company tax from 30 per cent to 25 per cent are not modelled, for example. It does, however, present a coherent plan for change, and offer an implementation timeline.
There are 93 actions proposed over 10 years in policy areas including fiscal policy, population growth, infrastructure, education and the labour force, trade, energy, and the environment.
The BCA wants stronger fiscal discipline and a more flexible industrial relations environment, of course. But it argues for many other things, including population growth and high immigration intakes, a tax system cleanout, a merger of energy and environmental policy, and an intensification of infrastructure investment including investment funded by government borrowing to lock in a doubling of infrastructure investment to 4 per cent of gross domestic product during the resources boom.
The proposed cut in the corporate tax rate from 30 per cent to 25 per cent would on its own create complex economic ripples that required examination.
Company tax is running at about $74 billion a year, so the cut would cost about $12 billion in today's dollars. The value of companies would rise, however, because valuations are a function of earnings strength, and capital gains tax would benefit as asset values increased. More generally, a lower tax rate would tend to boost investment activity, innovation and employment.
There would be a political dimension in the fact, for example, that dividend imputation credits would be less valuable to investors in a 25 per cent regime, and the general logic of a cut would be a debated.
Opponents would note, for example, that corporate profits rose from about 16.7 per cent of gross domestic product in 2003-04 to 19.7 per cent of GDP in 2011-12. Proponents might reply that corporate tax here supplies 18 per cent of all tax revenue, twice as much as the OECD average.
What the BCA is really after is a complete overhaul of a tax system that currently sees 115 taxes raise only 10 per cent of total tax revenue, and it wants it negotiated against a commitment to hold tax at a maximum of 23.7 per cent of GDP. It thinks indirect taxes including the GST would rise as states lost some of their taxes and federal-state finances were reformed - but in this the report shows that it understands two things: first, that it is pointless to propose sweeping reform to politicians without at least producing a rudimentary implementation road map and, second, we will only know definitively where we need to go if we work out where we are starting from.
It recommends therefore that a comprehensive intergenerational report be completed within 18 months, to replace a report released by the Commonwealth government in 2010. The 2010 report suggested that on current settings government spending would be exceeding revenue by 2.75 per cent of GDP by 2050 as the ageing baby boomer generation moved onto government stipends, for healthcare in particular. The BCA believes that a new report that looked at all levels of government would conclude that the total potential deficit is more than 5 per cent of GDP. That is unsustainably high. GST would need to rise to 25 per cent to fill it, for example.
The gap is created by both too much recurrent spending - the Labor government's legacy - and too little recurring revenue - the Howard's government's legacy. The report suggests therefore that a comprehensive audit on the size, scope and efficiency of government spending also be undertaken as soon as possible.
Tighter fiscal rules including the ceiling on tax revenue as a percentage of GDP would follow, and the first substantial changes in the tax mix would be implemented in years three and four of the decade-long plan.
Tax reform would continue for the rest of the decade as trivial taxes were axed by the Commonwealth and the states, some taxes including the GST were increased, Commonwealth-state financial relations were reformed and industry-specific tax measures were also rationalised.
On some things the BCA is in clear conflict with the Labor government. It wants the Fair Work Act liberalised as soon as possible, for example.
Overall, however, it has come up with a far more pragmatic document than ones it has produced in the past, and made itself more relevant in the process. Its tax reform timeline fits with the Coalition's own plan to deliver a white paper on tax reform after about two years in government, for example, and other reforms are on similar fast-start, slow-burn timetables that run for several years. If we need longer than that to get the job done we are in trouble.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
The Business Council of Australia (BCA) has published a 10-year national economic rejuvenation plan featuring 93 actions across fiscal policy, population growth, infrastructure, education, trade, energy and the environment. Key tax proposals include a cut in the standard company tax rate (the report discusses reducing corporate tax from 30% to 25%), a broad “tax system cleanout” that would axe trivial taxes and rationalise industry-specific measures, and a ceiling on total tax revenue as a share of GDP.
According to the article, company tax currently raises about $74 billion a year, and lowering the corporate rate from 30% to 25% would cost roughly $12 billion in today's dollars.
The article explains that company valuations are linked to earnings strength, so a lower corporate tax rate would generally increase after‑tax earnings and push up asset values. That lift in valuations could also flow through to capital gains tax receipts. However, dividend imputation credits would be less valuable under a 25% regime, which is an important consideration for dividend-focused investors.
The BCA argues that a lower corporate tax rate would tend to boost investment activity, innovation and employment. The report does not model every impact in detail, but it treats a tax cut as a policy likely to encourage business investment and growth.
Opponents point to the rising share of corporate profits (noted in the article as increasing from about 16.7% of GDP in 2003–04 to 19.7% in 2011–12) and worry about revenue loss. Proponents counter that corporate tax currently supplies about 18% of all tax revenue—around twice the OECD average—and argue a cut could spur growth. The article also notes a political dimension around the reduced value of dividend imputation credits and that some BCA reforms (for example, liberalising the Fair Work Act) would conflict with the Labor government.
The BCA recommends completing a comprehensive intergenerational report within 18 months (replacing the 2010 report) and conducting an audit of government spending to establish where reforms should start. It proposes tighter fiscal rules, a ceiling on tax revenue as a percentage of GDP, and staged implementation: the first major tax‑mix changes in years three and four, with continued reform through the rest of the decade.
Yes. The BCA’s analysis suggests long-term fiscal pressures could be large (the article states a potential total deficit of more than 5% of GDP) and that addressing the gap might require changes to indirect taxes. The report notes GST could need to rise (the article gives a hypothetical GST around 25%) and that states could lose some taxes as federal‑state finances are reformed.
Everyday investors should follow the timeline and key milestones the article highlights: completion of the intergenerational report, government white papers on tax reform (the article notes the BCA timeline aligns with a Coalition plan to deliver a tax white paper after about two years in government), any announced corporate tax rate changes, shifts in dividend imputation rules, infrastructure spending plans, and proposed changes to GST or other indirect taxes—because these moves can affect company profits, valuations and income from investments.
Call 1300 880 160
Start a chat
Schedule a call
