The Australian government’s plan to cut the corporate tax rate to 25% will deliver a $999m-a-year windfall to the US Internal Revenue Service (IRS) when fully implemented, a progressive thinktank has said.
The Coalition government wants to cut the corporate tax rate from 30% to 25% by 2026-27, and the tax rate for small businesses from 28.5% to 25% by 2026-27. It hopes the move will boost gross domestic product, profits, jobs and wages.
However, Australia and the US have a foreign tax treaty under which US companies in Australia pay the IRS the difference between the company tax rates in the two countries.
The Australia Institute has noted that, while the US rate is 35% and Australia’s rate is 30%, if the difference grows as a result of a lower Australian rate, the IRS will collect more tax at the expense of the Australian Taxation Office.
It estimated based on IRS figures the cost to Australia’s tax base will be US$732m (AU$999m) a year in 2026-27, or a total of US$8.07bn over the first decade after the tax cuts have been fully implemented.
Ben Oquist, the executive director of the Australia Institute, said: “A key beneficiary of the proposed company tax cuts is the American tax office. Various American companies operating here will not benefit – they will simply pay the difference in the United States.”
Oquist said the US was the largest foreign investor in Australia, accounting for over a quarter of all foreign investment.
“American firms operating in Australia will not invest more, employ more or be any more competitive after Australia cuts the company tax – they will simply pay less tax here and more tax in the US,” he said.
Oquist claimed the economic case for company tax cuts was poor, delivering “growth dividends within the margin of error [that are] between 10 and 30 years away”.
“Even if we were to accept that cutting company tax did bring ‘jobs and growth’, this is not the case if the company’s tax bill is not cut, but simply transferred to another country,” Oquist said.
“The fiscal price for the tax cut is significant and we know some of the revenue cost is just a gift to the United States government.”
Australia’s finance minister, Mathias Cormann, said the Australia Institute’s claims were “factually incorrect” and “deeply and utterly wrong”.
“I suspect the Greens-aligned Australia Institute is not the most reliable witness when it comes to the effect of economic policy,” he said.
“A more competitive company tax rate will attract investment, it will boost productivity, it will increase the size of the economy permanently by more than 1% in the long term.”
Cormann said the former treasury secretary Ken Henry had said the biggest beneficiary of a lower company tax cut would be workers because they would help secure their jobs and lead to increase in real wages.
