JUST two months ago Malcolm Turnbull came within a whisker of winning parliament’s approval for his most cherished policy: cutting the corporate tax rate from 30% to 25% over ten years. At the last minute he failed to secure a couple of votes in the Senate, where his conservative government lacks a majority. Undeterred, on May 8th the prime minister made tax cuts the centrepiece of his government’s budget for the coming fiscal year. As well as lowering rates for business, it also included cuts in personal income tax. Mr Turnbull, whose government has long trailed Labor, the main opposition, in opinion polls, hopes his tax strategy will reverse his fortunes at a federal election due next year.
Among rich countries, Australia has lagged in cutting corporate taxes. It last did so 17 years ago. The Business Council of Australia, a lobby group, complains that the rate is “frozen in time” compared with the American one of 21%, which is also the average in Asia. The Treasury worries that Australia risks becoming “increasingly uncompetitive internationally”.
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Business taxes are Australia’s biggest source of revenue after personal income tax. Revenue from both is buoyant, thanks largely to rising employment and mining profits (see chart). The economy is entering its 27th year of unbroken growth. After years of deficits, a balanced budget is in sight next fiscal year and a surplus a year later. A former banker and businessman, Mr Turnbull proposed a corporate-tax cut at the previous election, in 2016. He argued it would pep up the economy by encouraging businesses to invest and hire more. There was “no question”, he said. “You’ll see a rise in wages with a reduction in company tax.”
Mr Turnbull has struck an even bolder note with his income-tax cuts. They are worth about A$140bn ($104bn) over a decade, almost twice as much as the corporate cuts. The government proposes ditching a 37% tax rate that kicks in on earnings over A$87,000, which would leave 94% of taxpayers handing over just under a third of their incomes in tax. But Labor has suggested it may not support the full plan.
The business-tax cuts, too, still face a rocky legislative road. Parliament has already approved them, but only for firms with annual turnovers of A$50m or less. When the government reintroduced the plan in March, it needed the votes of just two independent senators to extend the cuts to all businesses. One of them, Tim Storer, an economist, argued the cuts were too “narrowly cast” and called for broader tax reform. He remains unconvinced.
Another complication stems from a royal commission Mr Turnbull reluctantly set up in December to look into misconduct at banks and financial-services firms. Revelations of shabby treatment of customers have hurt the industry’s image. Derryn Hinch, a former journalist whose Senate vote the government also needs, wants banks excluded from any business-tax cut. To include them, he says, is “not only immoral, it’s politically suicidal”.
Some question the claimed economic benefits of corporate-tax cuts. Saul Eslake, an economist, compares Australia with Canada, which has cut its corporate-tax rate by more than the Turnbull government proposes. Mr Eslake calculates that investment and wages have risen by more in Australia than in Canada since Canada began to cut tax rates in 2000. A survey of some 130 corporate bosses by the Business Council of Australia, leaked in March, bears out his doubts. Less than a fifth said they would increase wages and hiring as a result of a tax cut. Most said their priority would be capital investment and increasing returns to shareholders.
A recent opinion poll showed greater public support for cutting debt than cutting taxes. At A$341bn, or 18.6% of GDP, Australia’s net debt is quite low by global standards. Mr Turnbull is convinced that voters will thank him for lowering their bills—if he can persuade the Senate to do so.