Yet Australia’s corporate tax system was clearly built for a long-past economic age. Yet today, it fails to live up to the vision and promise of America’s most successful infrastructure paradigm. Renowned economist Ross Garnaut argues that the current framework disproportionately benefits a select few powerful firms while stifling broader economic growth. As Australia’s economy struggles with an unprecedented long-term slump in business investment and real wages, cries for reform are growing louder and more desperate.
The PC very recently released much-anticipated interim recommendations directed at completely overhauling our corporate tax landscape. Second, it raised the alarm on the increasing oligopoly power that extracts super-normal mark-ups. This trend has driven the nation’s dangerous productivity and wage stagnation. So too has the share of corporate income that comes from “economic rent.” In turn, the PC calls for some brave and significant measures to reduce the tax burden on smaller businesses and encourage greater investment and productivity.
The Dominance of Oligopolies
Productivity Garnaut stresses that Australia’s economy is becoming more and more concentrated, where a few firms are getting most of the rewards. He notes that 29 industries exhibit oligopoly rents, but a staggering 85 percent of these rents are concentrated within just five sectors: banking, wholesale and retail margins, bank fees, and telecommunications networks.
“In many sectors, a small number of big firms exercise market power to the detriment of consumers, while ever more complicated regulatory and tax systems impose higher costs that keep new entrants from joining in or scaling up.” – The Productivity Commission
This dangerous concentration of power also poses economic concerns. It is an anti-competitive move that reduces consumer choice. The PC’s detailed findings expose an extraordinary and critical turning point in Australia’s corporate tax landscape. Their economic rents now account for 54 percent of corporate tax revenue, up from just 41 percent six years ago. This change casts important light on something the structure of our economy may be doing more and more to help established, dominant firms fend off innovative upstarts.
Falling Investment and Stagnant Wages
Coinciding with and, presumably, partly due to the growth of oligopolies, business investment in Australia has tanked over the past 10 years. This worrying trend is bad news for productivity growth, which has ground to a halt to levels not seen since before the end of World War II. Garnaut points to a sobering contrast in Australia’s performance over the past three decades. The dreams of the historic economic success of the 1990s era couldn’t be more oppositional to the troubles we’re dealing with now.
“The Australian economy has performed well compared with comparable countries over the last three decades only if we average the excellent performance in the 1990s and the poor performance over the past decade.” – Ross Garnaut
This makes the tick of stagnant real wages even worse. And it’s not like workers have made up for it with stronger growth in their wages. Underlying this stagnation is a systematic lack of investment in productive capacities. The PC’s analysis suggests that reforms in corporate taxation could incentivize investment, ultimately leading to better wage growth for Australian workers.
Proposed Changes to Corporate Taxation
The PC’s interim recommendations strongly support moving Australia away from its reliance on corporate tax. One of the most notable proposals includes reducing the headline company income tax rate from 30 percent or 25 percent to 20 percent for companies with revenue below $1 billion. This change is intended to relieve financial pressures on smaller businesses so they can reinvest and expand.
The good news is that the PC offers a better way forward. As an alternative funding mechanism, they suggest a 5 percent “net cashflow tax” on company profits. Garnaut and his co-authors Craig Emerson, Reuben Finighan and Stephen Anthony point to a remarkable turnaround. This adjustment will provide greater ease of tax administration while making taxation a more accurate reflection of real economic activity.
“This paper suggests a major change in approach to taxing corporate income.” – Ross Garnaut et al.
The Legislature’s proposed cash flow tax would be a much more effective way to capture economic activity while imposing fewer direct disincentives against investment. Garnaut points out that at least half of corporate tax revenue is the normal return on capital. This reliance can greatly damage overall economic growth, due to its double disincentive effect.
“About one-half of revenue is collected from normal returns to capital, doing considerable economic harm through the double disincentive effect.” – Ross Garnaut
Moreover, Garnaut emphasizes that taxing economic rents—which theoretically do not harm economic activity—can provide a pathway for reducing taxes on millions of smaller companies across Australia.
