Thank you, everyone, for that warm welcome.
It is wonderful to be back at the Centre for Independent Studies — an institution that has, since its beginning, been a vital source of ideas and a strong voice for good public policy in Australia.
It is also hard to believe how long it has been since I was last here.
Almost two years ago to this day, I spoke to many of you about Australia’s future prosperity. I focused on the importance of fairness to the reform process, and the need for good public policy advocates to reclaim the fairness agenda.
It was a speech that, as you may recall, ruffled a few feathers beyond these walls.
You also may recall that on that day I mentioned enterprise; which, unfortunately, time restricted me from exploring.
But I want to revisit that theme today — and to do so in the context of the Turnbull Government’s plan for tax reform, and delivering greater prosperity for all Australians.
Jobs and growth
Now, as you know, the Government went into last year’s election with ‘jobs and growth’ at the heart of our campaign.
This was hardly surprising; jobs and growth are, after all, how you build a strong and prosperous nation. That is something the Coalition has always understood.
Over the course of eight long weeks, these three words were repeated again and again — as political campaigns demand. However, while it was undoubtedly the right focus, some at the time dismissed these words as meaningless.
Yet nothing could be further from the truth.
A growing economy pays for our much-valued social safety net. It pays for our health and education systems. It pays for our national security and vital infrastructure.
A growing economy leads to jobs, and jobs create purpose, opportunity and security, bolstering living standards and our economy.
Ultimately though, the bedrock on which jobs and growth are founded – is enterprise.
After all 87 per cent of all jobs in Australia are in the private sector.
And it will be enterprise that continues to shape our present, and our future.
Company tax
Encouraging enterprise must be the driving force behind reform to Australia’s tax system. Reward for effort — not the politics of envy — is the way forward if we are to prosper in these rapidly changing times.
And that is especially evident when it comes to company tax.
Australia’s company tax rate, as most of you know, has remained at 30 per cent for more than 15 years. Over that period, many other countries have moved to reduce their rates.
It means that, today, our company tax rate is too high by international standards.
Fifteen years ago, Australia had the ninth-lowest corporate tax rate among advanced economies.
Today, only five of the 35 countries in the OECD have a corporate tax rate higher than ours.
In 2014, Australia’s corporate taxation was 4.7 per cent of gross domestic product, while the Organisation for Economic Co-operation and Development average was 2.8 per cent.
Times have changed. So what does that mean?
As economies become more open, barriers to investment have a greater impact on economic growth.
A high company tax environment means Australian companies have more difficulty attracting funding, making them less able to invest in their businesses — in their machinery, technology, and in their workers.
A high tax environment means companies are less productive; and it means foreign investors are discouraged from doing business here.
It is, in short, a tax on jobs and a tax on growth. And it is everyday Australians who pay for that.
So Australians need our tax system to be more competitive.
The Turnbull Government’s 10 year enterprise tax plan begins with tax cuts for small and medium-sized companies, and will eventually lead to a flat tax rate of 25 per cent for all companies.
This rate would be consistent with the current average combined company tax rate across OECD countries — which has declined from 32 per cent in 2000 to 25 per cent in 2015.
It is an important move and, as I’ve noted, a much-needed one.
Many countries we are competing with for investment have more attractive company tax rates, and are even looking to further reduce them.
As we’ve heard recently, President Trump would like to see the US tax rate come down from its current level of 35 per cent to somewhere closer to 15 per cent.
Further north, Canada, a country that is comparable to Australia in size and natural resources, has reduced its company tax rate by more than 20 per cent over the past decade, while in our region Singapore cut its rate from 20 per cent to 17 per cent between 2007 and 2010.
It is also worth pointing out that many countries have managed to do this while simultaneously improving their budget bottom lines.
In 2010, for example, the newly elected UK Government was faced with the aftermath of the financial crisis and a budget deficit of around 10 per cent of GDP. Despite this, they announced and implemented phased company tax reductions to spur growth.
Under the UK Government’s roadmap, tax rates have dropped from 28 per cent to 20 per cent, and are scheduled to fall further — to 17 per cent.
Over the same period, the UK’s budget deficit decreased to around 4 per cent of GDP.
These lower tax rates have supported a steady and sustained recovery in business investment, which has increased nearly 25 per cent in the six years to March 2016.
And across the Tasman, New Zealand cut its company tax rate from 33 per cent to 28 per cent between 2008 and 2011, while also returning its budget to surplus.
So with that in mind, the idea that reducing company tax would damage the budget — or is, in some way, a misguided or unworthy pursuit — is incredibly short-sighted.
Of course, such actions cannot be taken without a firm commitment to budgetary discipline, but it is false to suggest that tax cuts or budget discipline is an either-or choice. Indeed, last night the independent Governor of the Reserve Bank, Philip Lowe, said that “like other countries, we face the challenge of responding to [international tax competition], while achieving a balance between recurrent spending and fiscal revenue.”1
But maybe we should think about it in another way.
At the moment, the UK is like a petrol station hanging a headline price of 20 cents out the front for international investors. The UK sign has been gradually ticking down, and business has performed well, so much that it’s looking to lower it further to 17 cents. The US is talking about hanging a sign saying 15 cents and making the station more user friendly. New Zealand’s petrol station was losing money a few years ago, and while it still has a premium price, lowered the price by 5 cents to 28 cents helped it back into the black. It’s a similar story in Canada. Now the Australia petrol station is fantastic – it has a reputation for great customer service and reliable product, but how do we think it’s going to go if it keeps hanging 30 cents out the front?
Australian modelling predicts that reducing the company tax rate from 30 per cent to 25 per cent would secure a permanent increase in business investment of up to 2.9 per cent over the long term — which is equivalent to around $6.5 billion in today’s dollars.
This translates to a permanent expansion of the size of Australia’s economy by more than 1 per cent over the long term, as well as an increase in real wages.
The Opposition argue that a cut in the company tax rate will advantage those foreign companies that have been involved in aggressive tax minimisation in Australia. The Government is clear that all tax payers must pay the right amount of tax in Australia. We don’t believe in self- help approaches to tax reform.
Our actions support our determination to ensure that Australia receives taxes that reflect the extent of their economic activity in Australia. This week the Government has introduced the Diverted Profits Tax, which complements the Government’s 2015 legislation introducing the Multinational Anti-Avoidance Law.
Political interest vs national interest
So why is there such scepticism about a company tax cut in the community?
The craven politics of perpetual opposition has certainly played a part. So rather than enjoying bipartisan support on the merits and concept of a company tax cut from Labor, we have the spectacle of the Shadow Treasurer and Leader of the Opposition denouncing a policy that they once supported.
It was not that long ago that the Shadow Treasurer, Chris Bowen, said in his book ‘Hearts and Minds’, “It’s a Labor thing to have the ambition of reducing company tax, because it promotes investment, creates jobs and drives growth.”
He acknowledged, “At 30 per cent, our company tax rate is now above the OECD average… It is how the rate compares to that of our competitors that counts.”
Similarly, the Leader of the Opposition, Bill Shorten, used to regard company tax cuts as an economic and social good.
He said, “Any student of Australian business and economic history since the mid-80s knows that part of Australia’s success was derived through the reduction in the company tax rate” 2and “Cutting the company income tax rate increases domestic productivity and domestic investment. More capital means higher productivity and economic growth and leads to more jobs and higher wages.”3
Undoubtedly, in the twitter age, there is also a challenge in holding people’s attention long enough to win the argument. After all, the arguments I articulated necessarily take more than 140 characters to articulate, let alone substantiate.
But in truth, I think the problem is that for those of us who are economically responsible, we have spent too much time arguing the utilitarian argument, and not enough time prosecuting the values case. We need to argue both.
So, yes, we: the Government, the Centre for Independent Studies and those who are engaged in the national discussion who believe in responsible economic policy need to spell out the case for lower, competitive corporate taxes.
We need to argue that Australia is reliant on external capital. We need to explain that we have run a current account deficit for 49 of the past 50 years. We need to explain that this means that we rely on international capital to support job creation across the economy and our standard of living. And we need to explain that capital is mobile and that Australia’s tax rate needs to be internationally competitive in a world where other advanced economies have lowered their tax rates.
We need to explain that employees and the unemployed seeking work are the key beneficiaries of reduced company tax with years of research showing that company tax is overwhelmingly a tax on workers and their salaries.
These are compelling arguments, and we need to make them. But even more importantly, we need to better define what enterprise really means, what companies are, to make sure that they are seen for what they are: collections of individuals who are in turn members of families and their communities.
The values case
It’s too easy to think of companies as large, disconnected, impersonal masses. In an era where many accept our nation faces significant challenges - but few are prepared to accept change in government policy that might affect them - large, disconnected, impersonal masses are an easy target. Few have instinctive sympathy for them, indeed many have antipathy.
But we need to recognise and highlight that companies are simply vehicles for individuals. Regardless of size, they represent individuals voluntarily coming together to take risk and to invest their capital. Sometimes those funds are invested directly, sometimes through superannuation funds. But ultimately, the funds come from individuals’ salaries or pockets.
Companies also represent individuals voluntarily coming together to work as employees or contractors, to provide for themselves and their families and to pursue the dignity that comes with that. And they provide goods and services to other individuals to enjoy.
So taxes on companies are taxes on individuals. That’s true regardless of size – it’s easier to see for small incorporated businesses, but it’s also true for listed companies.
That places a strong moral obligation on governments to keep that tax as low as is reasonably possible. Any tax on an individual - whether direct or indirect, and no matter how justifiable - is ultimately an infringement on that individual’s freedom. That is a compelling argument in its own right.
But with company tax, there is the added dimension that the tax hits individuals who are actively seeking to get ahead or be self-reliant:
- Individual investors wanting growth find their companies face higher costs of capital and less incentive to take the risks that growth necessarily entails. In turn, that can lead to lower capital growth and lower long-term returns for those individuals.
- Hard working employees seeking independence from the government teat find that the companies employing them have a lower profit pool available for wage growth and less capital to drawn upon to support their jobs. Those out of the workforce wanting a job find that companies distribute profits to shareholders rather than investing in growth and the new jobs that come with it.
- Customers, who are looking to spend their hard-earned wages, find their suppliers are not investing as heavily or as quickly in order to deliver lower prices or improved services.
And that’s a critical point. There are some who would have you believe that reducing company tax only benefits the few.
In reality, however, most of the long-term benefits of a lower company tax rate will go to workers and households through increases in after-tax real wages, and permanently higher consumption.
Personal income tax
So rewarding companies for their efforts and encouraging enterprise would be a win for all Australians.
But it is not only reducing company tax that can make a difference.
As I said, enterprise is about everyone in the community — individuals like my grandparents, Alec and Gwen, who started a small business from their rented home: she made felt ties and he sold them door-to-door. That enterprising spirit later led them to open a milk bar, and then a grocery store.
Each endeavour was a risk that, fortunately, delivered rewards. They employed people, and gave their children the opportunities they never had.
I stand before you today as the beneficiary of their endeavours. And it is why I, along with my colleagues, know that you create growth and deliver jobs by supporting enterprise, not discouraging it.
To do this, people also need more money in their pockets and the belief that, if successful, they will be rewarded. That is why the Government has, under our tax plan, already lowered personal tax — and further reductions will remain a goal for us.
Because Australia, I’m sure we can all agree, relies too much on personal income taxes — particularly when compared to other developed countries and our Asian neighbours.
In fact, Australia’s reliance on income taxes remains largely as it was in the 1950s, and is projected to increase further as a result of bracket creep.
This phenomenon — which is really a stealth tax — reduces incentive and proportionally affects lower and middle incomes more than high income earners.
So we have, as I said, made a start on preventing that from happening.
Last year we delivered through the Parliament an increase in the upper threshold for the middle tax bracket, raising it from $80,000 to $87,000, which took effect from 1 July 2016.
This action provided modest relief for more than 3 million hard-working Australians, and will keep around half a million people out of the second-highest tax bracket until 2019–20 — rather than, as was scheduled, this current financial year.
In short, it maintains the reward for effort that was being eaten away by bracket creep. And it also helps to keep Australia competitive.
In similarity to company tax, many of our overseas competitors are promising to reduce tax levels on labour income, and decrease the number of tax brackets that are used.
For example, in the US the Trump Administration has committed to reducing the number of income tax brackets from seven to three, and lower tax rates.
And in the UK, the personal allowance — which is similar to our tax-free threshold — is being increased, as is the threshold for the 40 per cent rate.
This is something the Government is very conscious of. We live in an age where people are more mobile than ever before. And that means they can go to where rewards are greatest.
We need to make sure that we continue to attract and retain talent so that they can contribute to making Australia a more prosperous nation.
Conclusion
So let me finish by thanking the Centre for Independent Studies for, once again, inviting me to speak to you.
Our agenda is one that is driven by our belief in enterprise; our determination to support bold endeavours and reward Australians for their efforts.
That is the way forward in 2017.
Thank you.
1 http://www.smh.com.au/business/the-economy/borrow-for-infrastructure-while-cutting-tax-says-reserve-bank-governor-philip-lowe-20170209-gu9d7k.html
2 Interview on Sky News March 2016
3 Speech in the House of Representatives 2011