Should We Get Rid of the Company Tax?

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.

Details:

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:

  1. Simply raising or modifying the GST. AND/OR

  2. Increase the rate on some other existing tax. AND/OR

  3. 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:

  1. The GST and company taxes are equally regressive so there is no logical reason to favour one or the other on these grounds.

  2. 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.

  3. 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%.

16 thoughts on “Should We Get Rid of the Company Tax?”

  1. Thanks for the effort John.
    Will a lifting of the GST rate be considered a lift of State revenue or Federal ?

  2. Jumpy: I have this touching, but unrealistic, idea that a good idea will not be lost because of the dysfunctional relationship between the various levels of government. Logic says that because the GST increase would be replacing a federal tax the increase would either go to the feds or allow the states to take over some of the current funding that comes from the feds.

  3. Thanks for this, John.

    Just found a couple:

    Fears Labor May Raise Taxes On People Who Can Afford It

    Panic has struck the Australian public today with the Labor Party threatening an unprecedented move which will see taxes raised on people who can actually afford to have their taxes raised.

    The move, floated this morning by the Labor Party, will see a higher tax rate for those earning in the highest levels. This would be an unusual step for the Australian taxation system as it almost entirely forgets to punish the poor for making the moral choice of being poor.

    and from Lenore Taylor back in January:

    Australia doesn’t need to chase Donald Trump on corporate tax cuts.

    Basically we need to decide what kind of society we want to live in. I think the figures you give, John, show that there are plenty of options.

  4. Sorry, JohnD, I can’t support an increase to the regressive GST.

    Applying GST to exports is commercial suicide. I export mostly to Europe where VAT is 20%. So adding your increased GST to the VAT would have me moving my production to Eastern Europe very quickly, or lose my business there.

    What about just increasing the top rate back a notch, canning negative gearing and applying capital gains tax to speculative properties, like good old common sense says should happen.

    Then there is the commercial transactions tax route.

    Company taxes are not regressive for the general population, if anything they are progressive from the employer’s point of view, and applied where the cash flow is.

    This whole taxation argument is a total phurphy. It is really all about business forgetting how to do business and looking for an easy way of maintaining lifestyles as business opportunities slip through their fingers and their businesses collapse around them.

    This country is awash with mediocre management talent, low levels of imagination, nearly zero entrepreneurial drive (not true for the agricultural sector), and minimal marketing skills. Wake up Australia, and Government,…get over yourself you are causing industrial collapse with stupid ideologically driven ignorance.

    The factory body corporate got a plumbers price to fix a meter of broken storm drain pipe, fill the hole and place a 1 meter square cement slab over the top.

    $13,000

    That says it all. Completely lost perspective, and only willing to work if it is a rip off.

  5. Bilb: Getting exporters to pay the GST is not an essential part of the case for getting rid of the company tax.
    For this reason i have edited the export GST out of this post and created a new post that deals with the GST issue.
    If you copy your above comment to the new post I will, with your approval, edit your comment above out.

  6. BilB’s positive suggestions:

    What about just increasing the top rate back a notch, canning negative gearing and applying capital gains tax to speculative properties, like good old common sense says should happen.

    I think most of us could live with those changes.

    On imputation credits, I recall someone who should know, early in the debate, saying that if we ditched imputation credits company tax could be reduced to 18% without any impact on government revenue. I’d like to see the figures worked through, including the impact on a shareholder who receives the median wage.

    In principle, I don’t think shareholders should pay tax twice, once as part company owner and again as the private citizen. however it’s how the rest of the world operates, and chances are sooner or later we’ll join them. Meanwhile our company tax rates are not strictly comparable to others.

  7. My recollection is that different types of business are taxed in different ways and this distorts the way we work.
    Haven’t the time to do a complete tax review.
    I would comment that the subsides and special tax breaks have to be paid for by someone else (Who probably gets some of this back with their set of subsidies and tax breaks.) You would probably find that if we got rid of all the subsidies and breaks administration would cost less and most players would come out where they are now. (Simple minded people like me want things to be simple enough to understand even though governments definitely don’t want me to understand the stupid things they are doing.)

  8. JohnD, I think you are barking up the wrong tree with this argument.

    The GST increase to compensate would require an increase to a GST of 25% to cover the loss of revenue. That would throw housing affordability right out of the window for young people, let alone everything else. You are suggesting reducing real incomes by 15% just to save companies the effort of calculating their tax.

    The main advantage of company tax rate reduction is to do with retained earnings and business development, but do they really need that tax reduction? I don’t think so.

  9. The main advantage of company tax rate reduction is to do with retained earnings and business development, but do they really need that tax reduction? I don’t think so.

    BilB, I’d agree with that. Companies like CSL reinvest a lot of their profit and pay low dividends. We’ve owned them for 7 years and the dividend has actually increased by 142% in that time. The equivalent number for Ramsay Health is 150%.

    There is plenty of scope for growth and investment if that is what companies want to do in their circumstances.

  10. Bilb: Imputation means that company tax is effectively refunded on all dividends paid to Australian taxpayers. In addition, while company tax is actually paid on reinvested profits depreciation and other investment allowances as well as taxes on profit increases resulting from these investments mean this is also effectively refunded. In effect company tax is largely a very expensive to administer myth that results in little net contribution to government revenue. We may actually increase government revenue by getting rid of company tax as long as we do not reduce the tax paid by overseas investors.

  11. JohnD, from my understanding of it what you are saying is not true. The company pays the tax on dividends ant a nominal rate of 30%, then delivers a certificate to verify that for the shareholder’s tax accounting. If the dividend holder’s marginal tax rate is 30% then there is no further action required, the dvidends can be banked with no further tax payable. I however the shareholder’s calculated marginal tax rate is above 30% then the shareholder pays tax amounting to the difference between their rate and the 30% ie 15% if the mshare holder’s marginal rate is 45%. If however the shareholder’s taxable income is below the 18,000 then they will get a refund from the tax office of up to a maximum of the company tax rate at 30%.

    I am no expert at all on this and was as confused as everyone else until you made me think about it. I had a friend who was telling me how he used his franking credits to renew his car every two years. What he failed to say was that his farm was running at a loss and his franking credits delivered a very useful refund from the tax office.

    So unless there is something in this that I have missed, the tax office does not refund tax on all dividends, it provides a tax status certificate for tax paid dividends for the shareholder to use in calculating his/her total tax liability.

    The other way this might be being misunderstood is with those who have multiple negatively geared properties where the interest on loans is tax deductible and those with self managed super funds of mixed asset parcels might seem to be getting the franking credits as a free handout, but that will only be the case where the total taxable income is negative.

  12. Bilb: I was going on what Brian said about imputation including that it was introduced by Keating to avoid double taxation on company income. This was also supported in a recent article by Ross Gittens who said that, for this reason, the company tax cuts were a con. Unless you have a good link I would tend to bow to the expertise in this matter of Brian and Ross.

  13. Hi JohnD.

    Will the ATO serve as a credible source?

    https://www.ato.gov.au/Business/Imputation/

    To impute in this sense is to give an attribute, which for a dividend paid is the attribute of being tax pre paid.

    To think of it another way is that a franking credit is like a bus ticket. You buy a ticket before getting on a train. When a ticket inspector comes around (tax time) you show your ticket to show that you have paid for the trip. Otherwise you must pay again if you do not have one. Also if you have a second class ticket and are in the first class compartment, you will have to pay more for the same journey (as a wealthy high income person).

    The other word to use as a reference is “franking”, or stamping. Remember the good old days of bulk mailouts when letters went through the “Franking Machine” ie imprinted stamp each impression of which required a payment to the post office.

    Any way, thanks for bringing this up because I really did not understand it until I had to read up on it.

  14. This is what Ross Gittens said…

    “Dividends are taxed at the shareholder’s marginal tax rate, but less their franking credits. Should they not owe enough tax to extinguish the credit, the balance is refunded to them.

    The effect of this for Australian shareholders and super funds is to render company tax little more than a withholding tax, like the income tax businesses withhold from their workers’ pay packets.”
    …..and I have to say that is confusing.

    The missing information is that the profit of the company is a finite amount, lets say $142.87. So with with a 30% tax on that amount equalling $42.87 the company must pay up another $42.87 to release the funds as dividends. How ever from the point of view as the share holder the amount of money given to you is $142.87 (franked dividend plus the franking credit value) irrespective of the franking credit rate because you pay tax on the full amount at your own specific marginal tax rate.

    OK so I now see what the argument is. In other countries the company pays tax on profits then issues the dividend, then the shareholder pays tax again at their personal tax rate. In Australia if all profits were distributed to individuals in Australia then with a one hit tax there would be no point in having the company tax step, which as you all said was simply with holding tax.

    However, as you correctly pointed out foreign shareholders lose the franking value. But then as I pointed out at the outset not all profits are distributed, and this is where the company tax collects revenue for the ATO. Generally what happens in business is directors take a salary and leave funds in the business at the lower tax rate. The question then becomes what percentage of the $90 billion company tax is franking credits? of does this figure cover just the tax on retained earnings?

    I haven’t read all of Gittins article but if he later suggests that the company tax should be reduced, but the franking credits should be abolished that that is a step in the right direction from the perspective of increasing tax revenue while taxing those who can better afford it (superannuitants and company directors).

    The real discussion here should be what do companies contribute towards the tax base to cover the very considerable cost that they impose on the public and infrastructure to support their operations. Land, roads, services, communication infrastructure, policing, regulation, legal service, etc.

    On the surface of it if all profits are disbursed with no business specific taxation, then the operation of a business contributes nothing to the country for the very considerable cost of its presence. Taxation ultimately is entirely bourne by personal tax, meaning companies get a free ride at the expense of the public. I don’t think that that is at all fair.

    As Ross Gittins says,.. Penny Dropped?

    Rather than abolish company tax and tax exports, the real answer is abolish franking credits, then re-evaluate the company tax rate. Taxing companies then giving a dividend is not double taxation, it is taxing businesses appropriately for the government cost of servicing their interests, then disbursing the balance.

    So again JohnD, thanks for making me think that through.

  15. I had a long debate about this last night with a friend (economist by training) who, as I did, believed that companies paid tax. In the end he came to realise that it is only people who pay tax, companies as entities get a free tax ride. They pay fees for specific services but no general taxation, at least that is how I am seeing from what I know so far. More research required.

    So why is this distinction important? Well as businesses make ever greater financial returns from automation, their community impact stays the same or increases while the contribution they make to the government declines. And where those companies are foreign owned they can potentially contribute nothing at all to cover the cost of their presence, that burden falls on every one else’s shoulders.

    My conclusion is that Keating’s franking credits must go.

  16. Bilb: The logical way for companies to pay for the help they get from the actions of past and present governments is to either pay directly for for specific services and/or make general payments like the GST or payroll tax that are broadly related to the services received.
    I can see no justification for giving exporters and multinationals a better deal.
    Having said all that change needs to be done over time to minimize disruption and give the currency time to adjust to the new ta regime.

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