A few years ago, Scott Morrison was vociferously arguing that Australia was in a race on company taxes. Both Britain and the United States were cutting their company tax rates, and Morrison alleged that if Australia didn't follow suit, "the Labor Party will leave Australian businesses stranded on a tax island - uncompetitive with the United States, with the United Kingdom, with Singapore".
How things can change. The British Conservatives have now legislated to increase the company tax rate from 19 per cent to 25 per cent, taking effect from 2023. To pay for his infrastructure plan, President Biden is committed to increasing the US company tax rate from 21 per cent to 28 per cent. A global race to the bottom in company taxes has been replaced with a recognition that firms should pay their fair share of tax. Those elements in the Liberal Party still pushing for Australia to cut company taxes are looking as old-fashioned as the climate change deniers.
The new challenge today isn't tax islands with fair company tax rates, but tax islands that are bleeding the rest of us dry. In the Cayman Islands, a single building is the registered address for 40,000 entities, including shell companies and investment vehicles. Tax havens have been used by drug runners and kidnappers, terrorists and tax dodgers. To do business in a tax haven is to rub shoulders with some pretty unsavoury characters. Yet two-fifths of multinational profits now flow through tax havens, undermining the company tax base of advanced countries such as Australia.
What's the answer? Unlikely as it may sound, Donald Trump helped lay the groundwork for global norms on taxation when he implemented a minimum tax rate on global intangible income. Rather than accepting that "anything goes" when it comes to taxes, this approach puts a floor under company taxes, preventing a global demolition derby from destroying the global company tax system altogether.
In Paris, the boffins at the OECD, a rich-country think tank, have been working on proposals that would set a global minimum tax rate. They estimate that such an approach could add between $US42 billion and $US70 billion to global tax revenues. US Treasury Secretary Janet Yellen has flagged America's support.
At a time when Australian government gross debt is set to peak at 1 trillion dollars, you'd think there'd be a trillion reasons for Australia to engage with these discussions. Yet rather than being an active participant in these discussions, we're lazily sitting on the sidelines. The federal budget contained no significant initiatives that would improve the fairness of Australia's multinational taxation system
That's the wrong place for us at this moment in history. Last year, workers' share of national income dipped below half for the first time since the 1950s. Not since Elvis was topping the charts has workers' slice of income been so skinny. At the same time, company profits are booming (in many cases, thanks to JobKeeper handouts they didn't need). The average wealth of Australian billionaires has nearly doubled since the start of last year.
It simply isn't fair for Morrison and Frydenberg to ask those who have the least to pay the most. Why should the government be cutting foreign aid, squeezing universities, and making it harder for people with disabilities to access the NDIS - all while going soft on tax-dodging multinationals?
The early 21st century may be defined by two eras: before Covid and after Covid, or BC versus AC. A race to the bottom on company tax was an idea from the BC era. A race to global tax fairness will define the AC age. Only the dinosaurs will be left behind.
- Andrew Leigh is shadow assistant minister for treasury and the Member for Fenner.