The Productivity Commission (PC) has outlined that tax reform is one of the biggest levers Australia can use to encourage investment and productivity growth in its interim report on creating a dynamic and resilient economy.
Treasurer Jim Chalmers asked the Productivity Commission to undertake five inquiries, aimed at identifying key reforms for boosting productivity for Australia’s economy.
The interim report stated that the government’s role in producing a more dynamic and resilient economy can be achieved through taxation, spending or regulation.
“This inquiry recommends changes to the company tax system and to the way government regulates, to spur more investment and productivity growth,” it said.
The PC report noted that business investment had fallen substantially over the past decade, contributing to Australia’s lacklustre productivity performance.
“One of our biggest levers to encourage investment and productivity growth is the corporate tax system,” the report said.
“To improve dynamism and resilience, Australia needs to reduce its use of the current, inefficient company tax system and shift to a system that better encourages investment.”
The Productivity Commission has proposed lowering the company income tax rate to 20 per cent for companies with revenue below $1 billion.
It has also proposed a new net cash flow tax of 5 per cent, which would reward companies for capital expenditure by reducing their taxable income by the value of their investments.
“Over time, there is scope to expand the net cash flow tax to fund broader effective reductions in company income tax,” it said.
These changes to the corporate tax system, it believes, would have a significant impact on investment and gross domestic product (GDP).
“Modelling for this inquiry suggests the benefits of a reformed company tax system could increase investment by $7.4 billion (1.6 per cent), GDP by $14.6 billion (0.5 per cent) and labour productivity by 0.4 per cent, in a broadly revenue-neutral manner,” it said.
The Productivity Commission said the final report would have further dynamic modelling and elaboration on design of the new tax, which the PC will consult on before releasing the report.
The report also warned that the ever-growing burden of regulation also puts a significant brake on productivity growth.
“Businesses report spending more time on regulatory compliance. Australia has fallen on key international regulation indices. While regulation can make us safer, healthier and happier, too much regulation inhibits economic dynamism and resilience,” the report stated.
The PC report argued that the government needs a more effective counterweight to the risk aversion and other incentives that have created a thicket of regulations and rules.
“It should adopt a whole-of-government statement to commit to regulation outcomes that better promote growth and dynamism, and lead by example by outlining a series of productivity-enhancing reforms,” it said.
“There should also be increased scrutiny of regulatory proposals from cabinet, Parliament and a newly appointed independent statutory commissioner for the Office of Impact Analysis.”
In June, Treasurer Jim Chalmers acknowledged that tax reform would likely be a key driver in lifting Australia’s productivity.
Chalmers said the upcoming Economic Reform Roundtable – bringing together government, businesses, unions, civil society and experts – would serve as a forum for ideas, alongside a round of public consultation.
“It may be that there are some things that come out of the roundtable which could be implemented relatively quickly. We don’t know yet. And so let’s see what people bring to the table,” Chalmers told the ABC.
The Treasurer released the three-day agenda for the roundtable on Friday, which will take place later this month.
“This is a targeted agenda that has been deliberately designed to give us the best possible chance of building consensus on the direction of economic reform,” Chalmers said.