This proposal could improve productivity and incentive to invest. You can bet a simplistic slogan will endanger it
The Advertiser2 hours ago
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
The Australian political system is about to be stress-tested. The test will not be on some visceral, emotionally charged issue.
Rather it will come with a complex and prosaic matter that usually does not excite much attention: company tax.
The test will come with how the system responds to last week's Productivity Commission report which recommends a change to company tax that so far has only excited accountants and policy nerds.
The trouble is that the government has got to stay the course and get the measure through the Senate.
The way the numbers are, it means it must get the backing of the Greens, or the Coalition, or all of the other crossbench senators.
The recommendation is not for a cut to company taxes, despite some media characterising it that way. It is revenue-neutral. Rather, it is a change in the way companies are taxed.
The proposal is not just an Australian first, but a world first. It is to be the first step in moving from taxing company profits to taxing company cash flow.
It is fairly complicated, but bear with me.
At present, companies can only deduct depreciation on their investment at the rate of about 20 per cent a year, so their profits and the tax on them are going to remain fairly high, especially in the year or two after making the investment.
It is a major disincentive to invest. If the government changes to a cash-flow system, however, the whole investment cost is taken off taxable profits, or taken out of the taxable cash flow, from the day the investment is made.
Further, if that caused the company to make a loss, the loss can be carried forward to future years and would be adjusted upwards each year by the government bond rate.
Ultimately, the investment will result in a more profitable company paying more tax. At present, the disincentive means many investments are not made. It has resulted in stagnant productivity in Australia in the past decade or so.
We should look at company investment not just as shareholders and managers trying to make money, but also as empowering the employees of the company who would be retrained and who would be more valuable and whose work would be more profitable.
For the past 30 years or so, governments have allowed companies to bring in too much cheap labour, much of it semi-skilled or even unskilled. Like the tax system, that acts as a disincentive to invest in capital to make existing labour more productive.
It has made living standards lower than what they could be.
Further, the existing system favours established companies. This is because new players have to stump up a lot of investment up front and then start paying tax on notional, paper profits before they have made any actual money.
Under the cash-flow system, they do not have to pay any tax until they make real money after the investment money has been recouped.
And if the investment goes bad, the investors do not have the added burden of having paid tax on notional, paper profits.
With a cash-flow tax, new players would be more likely to enter the market. It would increase competition and reduce prices.
Australia's economy is one of the least competitive in the OECD. We have far too many monopolies and market sectors dominated by just a few players.
The tax system is one reason for this.
Politically, the change has some difficulties. If it is seen just as a company tax, the Greens and at least some of the crossbench will be against it.
True, the Productivity Commission is recommending a five-percentage-point cut in the tax on company profits. But it is adding a new five-percentage-point tax on cash flow.
Nonetheless, you can bet a simplistic slogan will endanger the proposal.
The other danger is from existing business groups, especially big business. You would think that business would support the reform, especially as the Productivity Commission is also proposing measures to reduce the regulatory burden on business.
But watch. Business, egged on by the Coalition, will be against this because they are far less interested in improving the overall state of the Australian economy than retaining their cosy monopoly positions in it. So, do not be fooled.
If anything, this proposal is too modest. It would shift only about a fifth of the company tax burden from profits to cash flow, giving time for companies to adjust and to work out if there are any unintended consequences.
Further, the Productivity Commission noted: "Australia's dividend imputation system makes the relationship between retained earnings and investment weaker than it is in other countries. That's because dividend imputation and franking credits will lead some shareholders to place higher value on receiving dividends than on firms reinvesting their profits."
At the very least, an overhaul of the company-tax system should include the removal of franking credits being paid in cash to "taxpayers" who pay little or no tax.
Certainly, franking credits should not be extended in any new company cash-flow tax.
The task is not so much articulating what should be done about our defective tax system and low productivity, but rather it is about exposing the selfish, destructive behaviour of existing players, which is dressed up as national interest.
The most recent example of that was the bizarre statement from Nationals Senator Barnaby Joyce that we should replace renewables with coal-fired power stations.
If the productivity debate sinks to that level in the Senate, there is little hope for constructive reform, and the Productivity Commission will have wasted its time and effort.
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