Massively increased trades and intercultural exchanges have made the world to be progressively interconnected; and the process of globalization has accelerated in the last few decades. With this drift, the federal government has been making policies that are focused at opening up global markets in addition to its domestic markets. Owing to the above aforementioned reason, the federal government has started using company tax rate as a strategic tool to expand domestic business markets and to also keep at par with the global tax competitions. In addition, the Australian federal government has planned to reduce company tax rates so as to make Australian companies competitive internationally and to create economic activities like increased foreign-direct investments, raise the corporate productivity, and grow the country’s gross domestic product. This paper aims to outline the Australian government’s proposition for a company tax rate reduction in comparison to global trends in the same subject, analyses the pros and cons of that policy, and provides insights and recommendations on the company tax rate reduction.
The Australian government aims at reducing the amount of tax paid in by corporations by introducing a cut in their income tax rates, from 30% to 25% which could cut the county’s revenue by $65 billion but has a potential of adding $20 billion annually on full implementation. The vital questions concerning the policy are if the country affords a corporate tax cut and still if the country’s businesses could still be competitive if it is not implemented. The policy is aimed at aiding small and medium businesses so that they can hire more employees. Some small companies which have already gotten tax cuts have already improved in the last six months.
Outline of the Government’s policy
OECD’s recent report on tax rates placed Australia behind a few other developed countries such as the United States and France but since then, the US has implemented corporate tax cuts. This policy will most certainly leverage Australia a competitive advantage against some markets. However, the variation in tax deductions could mean that various companies would pay different effective tax rates even if they may be of the same income bracket. Some companies may not even pay that level of tax citing numerous corporation expenditure deductions such as loses made in the previous years, research, developmental among other claims and that means the effective tax rate will be lower than the target rate. Whilst the government uses the policy as a bait to get more international investments in the country, other countries may not cut the corporate tax rates for that sole purpose.  Furthermore, the corporations within Australia are profitable within their rights thus are able to attract foreign money flows irrespective.
The government based the decision of the enactment of this policy on six principles. They are; government’s income adequacy, economic effectiveness of the tax system to businesses, and competitiveness of Australian companies on the global market. In addition, they considered shared equity between businesses and consumers, the simplicity of the tax system, and improvement of new investments. In competitiveness terms, the policy is geared towards increased capital flows which are vital for investment projections, economic advancement, as well as increased employment opportunities . Since Australia just like any other country is dependent on global capital markets, effective competition leverage can be arrived at by this policy which will enable businesses to attract foreign investors into the country especially on mining and other industries.
There is a trend in the reduction of corporate tax by other countries in the recent past. The United Kingdom has reduced the company tax rate from 26-22% between 2012 and 2014. The federal government of Canada has similarly cut the company tax rates from 18-15% in 2011. The US has recently cut theirs to a well 35% but has still announced a corporate tax reduction to 20%.  This trend implies that a cut in the company tax rates is a vital determinant for foreign firms’ choice of investment localities. Enhanced steps towards globalization enhance the prominence of locality’s choice of these firm’s decisions. Changes in the way of business undertaking increase the capacity of foreign firms to shift profits to favorable countries. This means that reduced effective tax rates promote the incentives for multinationals to make investments in Australia. Similarly, a tax reduction has proven to be a contributor in spurring economic productivity for future prosperity by growing the level of capital in the economic market.
The actual economic significance of the corporate tax reduction law includes the following. Reduction of alterations in tax systems as relates to financial decisions and depreciation resulting in an effectual provision of capital. It increases the gross domestic product by over 0.2% as there would be increased multinationals investment in Australia as well as increasing familial consumption. It reduces massive transfers to households hence keeping the government’s budget balanced. Since the capital stock stands to increase, the productivity level improves hence workers will benefit as their wages will be higher. Furthermore, familial consumption is set to increase in the country by 0.05%.
Due to the significance of this policy, various experts on economic matters contended on it. Anguelov (2017) contends that the policy has failed to produce the intended results and uses Japan which reportedly two after implementation of a corporate tax cut, their economy continued to contract. He contends that this policy affects a country variedly depending on experience, dependency, and business openness which outlines a country’s tax elasticity. A cut in company tax rates usually have two concerns; foreign-direct investments and gross domestic product. Tax elasticity that means some companies may differ in remission of tax as there is a disparity between statutory and effectual tax rates, the latter being lower than expected since multinationals could report their tax liabilities differently. Therefore, from reports on countries which have enacted this policy, there is a high foreign-direct investment but low growth in the GDP.
Political processes of governments have an important impact on the economic conditions of any country. This is because the federal government has a responsibility to ensure that they legislate on laws and policies that manage economic factors that ensure that the country’s economy is in line with the global markets. Political leadership should look for opportunities in the economic systems that seek not only to retain and attract foreign investors but also enhance domestic growth and leverage competitiveness of the country’s companies. Political transactions that are the division and decentralization of political process of constitutional changes affect implementation of corporate tax rate reductions since they affect statutory tax rates. Therefore, how the government is structured that is the number of people required to effect legislation affects statutory tax rates and hence affects tax incentives for foreign investment.
Insight and recommendations
There should be little or no contradiction on the corporate tax systems. There should be a well-defined territorial division that ensures that the tax rates that the multinationals are a true reflection of the process of tax reductions such that there is no discrepancy between effective and statutory taxes that they pay. However, the tax system should be able to offer competitiveness to the Australian companies as well as offer the corporate tax protection while preventing tax erosion at the same time. Left unchecked, foreign investments would not be attained as there would be a profit-shift, as is the case in the US economy which is over $100 billion.
The policy should be clearly designed and defined so that statutory tax is reduced, safeguarding of company tax rate by stringent earning stripping, avoidance of companies inverting their incomes, and a general reduction in foreign income taxes. This is aimed at stemming out corporate tax erosion. The world agencies on economic policies should consider global corporate tax consolidation as well as a clear distribution system for multinationals . The Australian government should tax Australian corporations their global profits with consideration of tax they have paid in other countries since this would make Australian companies to have much fewer incentives to move their profits to locations where tax rates are lower.
The political system should constantly make apt constitutional changes in the Australian market to be in tandem with the world markets to enable the country’s companies to have a competitive advantage in the global economy. Furthermore, there should be little to no discrepancies between official and actual tax rates so that a few companies may not be overburdened while other does not remit their taxes. In fact, since Australian mining industry is in dire need of domestic and foreign investments, it just might be a good idea to start the tax cut with mining companies so that both domestic and foreign investments will rise hence spurring Australia’s economy.
While indeed it is true that a reduction in the company tax rates leverages a competitive advantage for Australian firms, there is an increased international tax competition which unchecked could reduce capital stock since each country will be moving to reduce their tax rates therefore, the government should have an incentive to control capital stock. In conclusion, to effectively attain the aimed outcomes that are increased direct foreign investments, increased household consumption, increasing wages for workers, and promote productivity as well as enable the Australian companies to have international competitiveness, the policy should be implemented in a number of phases and each phase assessed after some time to ascertain its significance in the economy of the country, therefore I posit that this cut is good for all.