Finance Finance News There’s a small to medium-sized problem with the corporate tax debate

There’s a small to medium-sized problem with the corporate tax debate

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The Coalition is refusing to break up its tax cut bill. Photos: AAP
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The bottom line for all tax fiddling and reform is the punchline of the old Irish joke: I wouldn’t start from here.

The latest tax policy brawl – over Bill Shorten’s “captain’s call” promise to roll back company tax cuts for medium-sized businesses – is a case in point. Both the Coalition and Labor tax policies for small and medium enterprises are poor.

It appeals to the small business electorate for state and federal governments to hand out a little charity before elections – a lower company tax rate, a higher threshold or lower rate for payroll tax.

The usual justification from the politicians is that it’s a “leg up” for the little guys battling evil big business.

In reality, the special treatment for small business becomes an incentive to stay small. It’s bad policy, indicative of the second-rate thinking of second-rate politicians.

On a smaller scale than the extortionate effective marginal tax rates for individuals coming off social security to join or re-join the workforce, tax discounts for small businesses create a barrier to making those businesses better. Businesses growing from small to medium to large is what the nation needs, not a tribe of little businesses encouraged to stay little.

An example heard recently: a business found it had just breached the payroll tax threshold. The firm incurred administration costs of $5000 to pay a piddling amount of tax, but it was more the matter of the extra paperwork and hassle that was discouraging for the owner.

Discounting federal company tax rates is equally daft. It makes a complex tax system more complex.

It’s also inane to base the tax rate on a company’s turnover – there are high-margin, very profitable companies coming in under turnover caps while low-margin, barely profitable companies breach the cap and pay a higher tax rate.

No, it doesn’t make sense and both sides of politics are guilty of playing the game for the sake of winning the small business vote, not for the sake of the nation.

At least the Coalition’s aim of having a single company tax rate has some internal integrity. Labor’s desire to maintain hodgepodge rates makes no sense.

There is no shortage of smoke and mirrors in the latest battle. The reality for the vast majority of small and medium businesses is that the tax rate makes little difference to the bottom line as our franking system passes the benefit through to the owners.

The AFR this morning managed to find a medium-sized company that claims Labor’s rollback would cost a job. As usual with such yarns, there’s plenty of room to wonder about the detail, the owner’s claim that most of the firm’s net profits get reinvested in staff.

Businesses invest in more staff to make more profit, rarely out of largesse.

The aim of tax policy should be to work out the best balance of the nation’s competing interests and go with it.

Instead, all parties prefer to stick with fiddling at the edges – and sometimes doing harm in the process.

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