Cutting company tax is good, as long as you can pay for it and it does not block more urgent priorities.
Company tax trade-off
The Coalition has announced plans to shave 1.5 per cent off the company tax rate, which Kevin Rudd says is code for a GST hike on food.
The first is the issue with the Coalition's plan: let's call it arithmetically challenging.
Some people think business is always rolling in money and does not need tax cuts. The reality is the reverse. Lower taxes make business more competitive, and better able to expand and take on workers.
The Henry review proposed to cut the company tax rate from 30 per cent to 25 per cent. The Coalition's move is a modest first step. It would be two years off. It would reduce tax just to 28.5 per cent. And, in fact, only small and medium businesses would get a tax cut: for Australia's 3200 biggest employers, it merely compensates them for being forced to pay for the Coalition's pricey parental leave plan.
But the numbers quoted by Tony Abbott yesterday present us with arithmetical challenges. For example:
■ Mr Abbott would cut the company tax rate by one-20th from 2015-16. He tells us that would cost $5 billion in its first two years. That implies that he expects the company tax take in those years to be $100 billion.
But Treasury estimates that company tax in those two years will raise $156 billion. If so, the cost of the tax cut is $7.8 billion. The Coalition says its costing came from the Parliamentary Budget Office, but could not explain why it was so different from Treasury's.
■ Mr Abbott said this tax cut and the abolition of the carbon tax and the mining tax from July 2014 would all be paid for from $17 billion of savings set out in his budget reply in May. But Treasury estimates that the taxes he plans to abolish would raise $22 billion in that period. It estimates that between 2014 and 2017, the mining tax would raise $4.7 billion, and the carbon tax $9.5 billion.
Add that to the $7.8 billion of company tax revenue forgone, and we get $22 billion.
That's $5 billion less than the Coalition estimates its own savings will yield (and Labor disputes some of them).
OK, we all know that Treasury estimates are imperfect. The Coalition disputes some of its assumptions. Still, they are the only benchmark we have.