Cutting company tax won't drive investment: Australia Institute

New research ridicules the Prime Minister's claim that cutting the company tax rate will boost foreign investment, pointing out that almost all of Australia's foreign investment applications already come from countries with much lower tax rates.

The analysis by the Australia Institute finds that 97 per cent of the applications to Australia's foreign investment review board come from countries with lower company tax rates. By value, 71 per cent of applications come from countries with lower rates.

"All of this raises the question – if Australia is already successful at attracting foreign investment why would we give tax cuts to foreigners?" said the report's author David Richardson, a senior research fellow at the self-described progressive think tank.

"History shows that when Australia's company tax rates were adjusted in the past, foreign investment did not go the way expected. When the rate climbed to 49 per cent in the 1980s there was a rise, not a drop in investment."

The study finds that Australia's stock of foreign investment is dominated by 13 countries, some with higher and some with lower company tax rates than Australia's. Nine have lower rates than Australia's, among them China, Japan, Britain and the United Arab Emirates, which has a company tax rate of zero.

The countries with the fastest-growing investment in Australia include the United States (which has a higher tax rate) and Japan, Singapore, Hong Kong, China, Korea and Malaysia, which have lower rates.

"Throughout the whole debate it is assumed that company tax rates are the critical variable affecting investment," the report says. "However, any returns to the ultimate investors will depend on the individual tax system as well as the company tax and the interaction between the two. When we look at company tax alone Australia has the equal fifth highest among OECD counties yet when we examine the implied total tax rate Australia falls to 14th and is only marginally above countries such as the UK."

Britain has announced plans to cut its company tax rate from 20 per cent to 18 per cent, although it would retain a higher rate for financial institutions. In the United States, President Donald Trump has talked about cutting the rate from 35 per cent to 18 per cent.

On Wednesday at the National Press Club Prime Minister Malcolm Turnbull is expected to argue strongly for a cut from 30 per cent to 25 per cent, phased in over 10 years.

Peter Martin is economics editor of The Age.

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The story Cutting company tax won't drive investment: Australia Institute first appeared on The Sydney Morning Herald.

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