Following Treasurer Josh Frydenberg’s plea to Australian companies to lift the economy by choosing investment over special dividends and share buybacks, economist Ross Garnaut said full cash flow tax deductions for business expenditures might just do the trick.
Dr. Garnaut said an immediate and full tax deduction for business expenditures will give businesses an incentive to invest, thus shielding the economy against possible recession. He said it would be a “much more powerful” reform than accelerated depreciation or investment allowance that the government is considering.
“With a revenue neutral shift to a cash flow tax, it would powerfully increase incentives for investment,” he said.
“There would be a very big shift of the tax burden away from those who are making new investments to those sitting on their laurels and paying out dividends or buying back shares, so it would move in the direction the Treasurer wants.”
Dr. Garnaut and former Labor minister Craig Emerson– both key advisers during the Hawke administration on economic reform in 1980, have been advocating for cash flow tax model since last year.
The paper, co-authored by Reuben Finighan and Stephen Anthony, proposes replacing traditional company profits tax with a cash flow tax system that will make highly profitable companies contribute more tax.
Under the proposed system, businesses in mining, financial services, energy, and air transportation industries would pay more than businesses with average returns like those in retail and farming sectors.
Dr. Garnaut claims that latest estimates suggested revenue neutral tax rate for business cash flow tax model would be above the current 30 per cent corporate tax rate.
“The efficiency, productivity-enhancing and investment-increasing gains of this tax reform would be very large with a tax rate a few percentage points higher than the current corporate tax rate, to generate revenue neutrality,” he said.
“The tax burden will shift from those in competitive sectors to those in oligopolistic sectors.”
Start-ups would benefit as well, with cash offsets for their business expenses.
“That would cost revenue but be a huge efficiency reform because the current isolation of tax losses systematically biases the tax system away from innovation, risk-taking and new ventures.”
Aside from addressing issues like tax avoidance using profit-shifting strategies, the proposed cash flow tax system would also make it harder for multinational companies like Apple and Chevron to pay less tax than they owe by imposing charges for intellectual property and others.
The reactions from business groups are mixed with some acknowledging the benefits, particularly the incentive to invest while some opposing the idea of big banks, technology firms and miners paying more tax.
The proposed tax system was also previously rejected by the Morrison government and the Labor.
Whether the government restructure and adopt the cash flow tax system or not, it’s clear that full tax deductions for business expenditures are enough of an encouragement for many businesses, and that this is not going to be the last we’ll hear of this.
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