Australia should cut taxes for small businesses and implement a new tax that allows immediate investment deductions, the Productivity Commission says, laying the groundwork for the government’s economic roundtable.
The proposal to cut the corporate income tax rate for business earning less than $1 billion to 20 per cent and introduce a five per cent cashflow tax would boost Australia’s economy by $14 billion without worsening budget sustainability, the commission said in a report.
This would help lift the nation’s floundering labour productivity by 0.4 per cent.
Combined, the measures would incentivise investment in the economy by $8 billion.
Declining business investment has caused productivity growth to fall to less than a quarter of its 60-year average over the past decade, the commission’s deputy chair Alex Robson said.
“If we don’t get our economy moving again, today’s children could be the first generation to not be better off than their parents,” he warned.
“We need to spark growth through investment and competition – the best way to do that is to reform our company tax system.”
Businesses with annual revenue under $50 million pay a 25 per cent corporate tax rate while larger firms pay the full 30 per cent tax rate.
Under the commission’s proposal, businesses over $1 billion in revenue would continue to be taxed at 30 per cent.
A net cashflow tax of five per cent would also allow companies to instantly depreciate the full value of investments, incentivising companies to invest in more productivity-boosting capital.
The commission said it could be expanded over time if successful.
A cashflow tax has previously been championed by Labor-aligned economists including Ross Garnaut and Craig Emerson.
At a tax roundtable hosted by Independent MP Allegra Spender last week, former Treasury secretary Ken Henry said Australia would eventually have to move to a cashflow tax, but it would be a very big step.
ANU tax policy expert Viva Hammer said implementing a comprehensive cash flow tax had one huge problem – transitioning from the current system.
“The people who are going to invest will have a completely different treatment for the people who’ve already invested. What do you do with the existing investments?” she told the roundtable.
“It’s a tremendous change in the way you tax the country. So any tremendous change is going to have tremendous winners and tremendous losers.”
The commission also urged Treasurer Jim Chalmers to make a clear commitment to reduce the regulatory burden on businesses, while forcing regulators to consider the impact of their actions on economic growth.
“You need so many licences and approvals from different levels of government to start a cafe in Brisbane that the City Council introduced a check list with up to 31 steps to guide people through the process,” commissioner Barry Sterland said.
The report’s release came as the treasurer released a schedule for his economic roundtable, which kicks off on August 19.
Day one of the three-day summit will open with addresses by Prime Minister Anthony Albanese, Dr Chalmers and Reserve Bank governor Michele Bullock.
Productivity Commission chair Danielle Wood, Treasury secretary Jenny Wilkinson and Grattan Institute chief executive Aruna Sathanapally will also present to the roundtable.
Among the topics to be discussed are better regulation, tax reform, artificial intelligence, boosting business investment and attracting skills.
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