Corporate income taxation in Australia: Theory, current practice and future policy directions
Authors: Kristen Sobeck, Robert Breunig, and Alex Evans
This report provides a framework for policy analysis of the corporate income tax system in Australia to broaden understanding of the topic and heighten policy debate. It achieves this by tackling three questions:
- What are the main problems (distortions) associated with the current corporate income tax system?
- What policy options could be implemented in Australia to redress these problems?
- What is the best policy option?
This report argues that the introduction of an Allowance for Corporate Equity (ACE) is the best approach for corporate income tax reform. It also addresses how neither a decrease in the headline corporate tax rate nor the introduction of accelerated depreciation (or an investment allowance) — the two corporate tax “reform” proposals most commonly bandied-about in Australia — represent effective reform. Both policies retain the system’s pre-existing distortions. Decreasing the headline corporate rate in isolation could improve investment in the long-run, but provides a windfall gain to existing equity investors. Similarly, while investment allowances and accelerated depreciation spur investment in the short-run (but not necessarily the long-run), they tend to favour specific industries.
Finally, the report includes several appendices which discuss: the difference between the “normal” return to investment and economic rents; the history of corporate income taxation in Australia; an overview of how the Commonwealth and states and territories tax natural resources; an overview of methods used to calculate effective corporate tax rates; a detailed explanation of how the imputation system works in practice and its losers and winners; and a review of Australia’s two sectoral cash-flow taxes, the Petroleum Resource Rent Tax (PRRT) and the Northern Territory’s Mineral Rent Tax.
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