Debate is raging in Australia over the merits of a proposed company tax cut from 30% to 25%. The Labor Party is opposed to the reduction but the Liberal/National Coalition is determined to go ahead.

Corporate taxes around the world are falling, the most notable being the US legislation last December to reduce their statutory rate from 35% to a flat 21%.

Most economists agree that in theory a lower company tax rate would help to stimulate business investment and wages.

However, there is disagreement about the size of the potential gains. The Treasury says the phased reduction of corporate tax would boost economic growth by about 1% in the long run. This is a very modest economic gain for an annual cost of around $15 billion.

In Australia, the benefits of any reduction in the corporate tax rate would go to foreign investors and owners of capital. Some economists say that Australia is already able to attract foreign investment. While the current 30% statutory rate looks high, the rate that companies actually pay is reduced by deductions such as depreciation, research and development offsets, and the ability to carry forward losses.

'Taxes are money that gets spent', one economist argues. 'Taxes that aren't raised from one place have to be raised from somewhere else.' Cuts to personal income tax rates may be preferred, to address the problem besetting the Australian economy – weak consumer spending.

The conclusion of another economist is: 'Don't expect the effects of a corporate tax cut on economic growth to be transformational. But in the short run, you might expect an extra boost to the economy.'

Source: Kellogg School of Management; Fairfax media, March 2018.

The information in this article has been taken from several reliable sources but does not necessarily reflect the views of UBT.  No short article can cover a topic completely; it is not intended that you should rely on this information for business decisions.