The Commonwealth government has just gained support for a tax cut for business’s earning less that $50m per yr. The benefits of this change are debatable. The only things we can be sure of is that badly needed government revenue has been sacrificed and if anything, the administration of this tax will become more complex.
It might be smarter to get rid of this complex and difficult to administer tax altogether and replace the lost revenue by either increasing the take from already existing taxes and/or some new and simpler tax.
This post looks at the implications of getting rid of company tax.
In 2014/15 Australian company tax was $80 billion, 18% of the all level of governments total tax take of $446 billion. By comparison, the GST was $58 billion and personal income tax $174 billion.
The company tax figure exaggerates the net contribution made to government revenue. (This is because the franking credit on dividends paid by companies to Australian shareholders is deducted from the income tax paid by the shareholder. (The franking credit is set so that an Australian shareholder does not pay company tax and income tax on the same profit.) In effect, company tax only adds to tax revenue to the extent that profits are re-invested or paid to shareholders who don’t live in Australia and cannot take advantage of the franking credit.)
So what might replace net company revenue? Possibilities include:
Simply raising or modifying the GST. AND/OR
Increase the rate on some other existing tax. AND/OR
Imposing another simpler tax such as transaction taxes.
Without knowing more about the effect of franking credits it is a bit hard to say what the GST would have to be to make eliminating the company tax revenue neutral.
It is worth noting that:
The GST and company taxes are equally regressive so there is no logical reason to favour one or the other on these grounds.
The company tax system is costly to administer and leaves plenty of scope for creative tax accounting. Simply raising the rates of existing taxes and getting rid of company tax would make significant savings in the cost of tax collection. Simplifying the GST would further reduce the cost of administering the GST.
Administration cost might also be reduced at the same time if we replaced the GST with a simpler alternative.
My guess would be that the best option would be to ditch the company tax and make up the lost revenue using a simplified GST with a rate a bit below 15%.