By Steve Marsten
On 20 December 2017, the United States (US) Congress passed US tax reforms including a reduction in the federal corporate tax rate from 35 to 21 per cent. That’s a whopping 40% reduction. Just for a moment – let’s not listen to all the naysayers (big spending politicians I mean) who only want to live in a world of high taxes. Let’s look at what this means for Australia. There is a global trend toward lower corporate taxes. In theory, a corporate tax rate cut stimulates investment by making more investment opportunities sufficiently profitable to attract financing.
The extent to which this is the case in practice will depend on how the tax cut is funded and whether investors consider the tax cut to be permanent. If the corporate tax rate cut results in an overall reduction in tax on US investments and investors believe that the tax cut is permanent, we are likely to see an increase in the level of US investment.
When you consider that the UK corporate rate is 19% for small corporates; France is reducing their corporate tax rates and Germany sits at 15%. Australia is a fair way behind the eight ball.
The magnitude of the resulting capital loss in those countries with higher tax rates like Australia will depend on the size of the US corporate tax cut – but I can tell you this is a BIG cut.
For Australia, the size of the negative impact will also depend on how other countries respond. As capital markets have become increasingly global and business locations increasingly mobile, governments have sought to drive economic growth in their jurisdictions by lowering corporate tax rates. The US reforms have the potential to accelerate tax competition between jurisdictions, making Australia’s current corporate tax rate increasingly uncompetitive internationally.
Here we only just got the 27.5% rate in for Corporates. Just ask yourself would you like to pay 21% or 27.5% and 30% in some cases here in Australia? Messrs Turnbull and Shorten do you not see the likely impact? Capital WILL leave Australia as a result of the US’s huge decision to free up domestic capital. Increased investment means increased workforces and more people employed. Both shades of politics should be happy. Let’s make 2018 the year of economic sensibility!
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