Opposition Leader Bill Shorten was quick to pummel the government last week for being soft on the big banks, following their decision to pass through only around half the RBA’s interest rate cut.

“Mr Turnbull will give the big banks another empty lecture and a tax cut,” he thundered. “I’ll give the banks a royal commission.”

Labor is on firm ground with its call for a banking royal commission. But when it comes to its ‘no corporate tax cut’ position, things get wobbly.

On the one hand, Labor is right to oppose tax cuts for the big end of town at this time ­– there’s just not the room in the federal budget given the large and persistent deficits run by both sides of politics.

On the other hand, Labor made a big mistake during the election by digging in on an outdated definition of where the dividing line between ‘big’ and ‘small’ business should lie.

The decision it took was entirely political. It decided to oppose tax cuts for any business over $2 million in turnover so as to make the rest of the Coalition’s $50 billion tax-cut package look like reckless pandering to the big end of town.

Labor’s error

Small business minister Michael McCormack did not get a seat in Cabinet. Photo: AAP

In fact, the $2 million figure is hopelessly out of date.

That definition was announced by former Treasurer Peter Costello way back in November 2006.

Had it even been indexed to inflation, it would now be $2.5 million.

Moreover, if Labor believed that small businesses were at the heart of job creation, it should have supported at least a small increase in the $2 million threshold to achieve the stimulatory effect the economy needs in the post-mining boom slow-down.

So the error was not opposing the bulk of government’s company tax cuts – it was in misunderstanding what a ‘small business’ really is.

The Coalition raised the threshold to $10 million, and Labor could still have differentiated itself on this issue by raising it to, say, $5 million.

That would capture a lot of businesses such as large pharmacies, small independent supermarkets, or capital-intensive businesses such a trucking firms.

A transport company with just a few drivers, for instance, may invest millions in road-train vehicles that by necessity require huge turnover to justify the investment.

That does not mean they’re a ‘large corporation’ – just a bunch of drivers in expensive trucks. And it’s exactly that kind of company that may put on another driver, administrator or mechanic if a tax cut improves their bottom line.

Labor must, therefore, quietly sweep the $2 million policy into the bin and take something much more sensible to the next election – $5 million might just do it.

Only then can it fully prosecute the ‘no corporate tax cuts’ line – a line that in itself has a strong economic rationale.

The Coalition is already on the back foot with the small business lobby having decided to take the small business ministry away from the respected and popular Kelly O’Dwyer – the new minister Michael McCormack doesn’t even get a seat at the cabinet table.

And Labor has wisely added new firepower to the role of shadow small business minister by appointed former ACT chief minister Katy Gallagher – who will sit within shadow cabinet.

The problem with corporate cuts

Shadow small business minister Katy Gallagher is included in the shadow cabinet. Photo: AAP

SME tax cuts are a fairly efficient way to stimulate job creation, because the business owners are usually Australian, and because improving their bottom-line encourages them to invest and hire – again, most often locally.

When big corporations get a tax cut, some of the same benefits can be observed – marginal projects may become viable, and hiring more staff more affordable.

However, when large corporations such as the big banks receive a tax cut, the benefits flow disproportionately to their overseas shareholders.

As explained previously, that’s because of the way Australia’s dividend imputation system works – foreign investors pocket the tax cut, while local investors do not.

On certain issues, both sides of politics put politics ahead of policy in the run up to the election – the Coalition, for instance, backed down on GST reform based on clearly bogus modelling, and told a string of untruths in support of its decision not to touch property taxes.

But whereas the government must now stick with bad calls it made for political reasons, the opposition has the luxury of quietly dropping its own.

The outdated small business tax threshold should be the first to go.

Read more columns by Rob Burgess here