Scrapping tax benefits for business tax cut would hit economy, research shows

New economic modelling commissioned by the Institute of Chartered Accountants has found the economy would take a hit if the Federal Government scrapped key benefits in order to fund a corporate tax cut, as recommended by the Business Tax Working Group.

Since the release of the report in early August, business groups have been protesting over the methods proposed for funding the cut – which include massive cuts to research and development funding.

New modelling by the Institute of Chartered Accountants, conducted by the Centre for International Economics, has tracked the economic impact of some of these recommendations. The report found gross domestic product would take a hit worth 0.08%.

Institute tax counsel Paul Stacey says this result was unexpected.

“In economic terms, Australia is operating at full employment. As a country, if we want to boost economic growth given that constraint, we have to boost capital investment.”

“If you withdraw these concessions, it’s a net negative. It won’t work.”

“I actually didn’t expect the answer we got.”

Some of the recommendations for cutting the rate to 28% include scrapping R&D benefits for both large and smaller companies, along with capping interest deductions and removing some benefits for mining exploration companies.

Several other groups including CPA Australia and the Tax Institute have spoken out against cutting these benefits, but this is the first economic modelling released regarding the proposed cuts.

Other business groups such as the Australian Industry Group have been critical of any cutting of R&D benefits, a criticism backed up by the software and pharmaceutical industries.

However, some disagree – the Tax Institute has previously said some proposals in the Working Group’s report should be given more attention if they only help a small subset of companies.

But Stacey says the modelling, while incomplete, suggests getting rid of the benefits would be counterintuitive to economic growth.

“The merits of cutting the company tax rate rest on the fact it will help Australian economic growth.”

“But if the compensating changes made to fund that growth outweigh the benefits, then that particular combination of choices doesn’t make sense.”

The three main areas identified for savings by the Working Group report include interest deductibility, depreciating assets and capital expenditure, and R&D tax incentives.