Lower company tax rates and changes to power pricing are among possible moves that would support the state’s economic development, according to local academic Peter Hartley.
Lower company tax rates and changes to power pricing are among possible moves that would support the state’s economic development, according to local academic Peter Hartley.
Professor Hartley, who is the UWA Business School-BHP Billiton chair in business of resources, said tax cuts in other jurisdictions would have a major impact on Australian investment.
He spoke to Business News on the sidelines of a conference hosted by Mannkal Economic Education Foundation in late June.
“Capital is very mobile internationally; you’ve got the company tax rate being reduced in the US,” Professor Hartley said.
“That makes it very hard for a company that’s comparing investing in Australia versus investing in the US to invest in Australia.
“Another important factor about company tax … if you think a tax change is going to be temporary, it has even more stimulatory effect on investment than if you think it’s going to be permanent.
“That’s why a lot of people are underestimating the stimulative effect of tax cuts in the US.
“If you think the Democrats are going to overturn them, it’s actually going to be more of a stimulus.”
Department of Treasury documents report similar findings.
“The International Monetary Fund’s (analysis) suggests that the reduction in corporate tax rates in the US, France and Germany will reduce GDP in other countries (including Australia) by around 1 per cent,” an internal December Treasury paper, later released to media, said.
“Tax reforms in these major advanced economies would cause the rest of the world to face a significantly higher required after tax rate of return to provide their own investment.”
The Turnbull government’s proposed enterprise tax plan, which would reduce the corporate tax rate to 25 per cent by 2026-27, would offset that reduction and have an immediate impact to mitigate capital outflows, the paper said.
Capital taxes have a significant impact in the resources industry, Professor Hartley said, because large investments were made in chunks at times when prices were high enough to encourage new capacity.
Expectations of tax changes exacerbated cycles, he added, while a further problem was that politicians were incentivised to promise low taxes and then renege after projects were completed.
Professor Hartley said a further reform to improve investment efficiency would be accelerated depreciation, enabling immediate expensing of capital spending, rather than over an asset’s life.
Depreciation rates did not always correspond to asset life, he said, and distortions were created as maintenance could already be immediately expensed.
An example in practice of systemic distortion was at a Port Kembla steel mill, where old furnaces had been kept and refurbished, considered maintenance, even though new equipment might have been more efficient.
The recent tax reform package in the US legislated for immediate full deductibility of capital spending until 2022.
By comparison, the federal Labor Party in Australia has promised an immediate 20 per cent deduction on assets worth more than $20,000.
Electricity markets
Professor Hartley, who advised on 1990s electricity reform in Victoria, also warned that power prices were not properly reflecting the costs of moves towards solar panels and distributed generation.
“It’s really an unstable feedback mechanism,” he said.
“(At the moment) you’re sending a signal … that by putting solar panels on your roof you’re saving fixed costs.
“What that means is that people who do generate solar, all those fixed costs in the system are then paid by the people who are left.
“Costs then go up and you have (even) more of an incentive to switch.”
Mechanisms where household solar owners were paid to supply into the network created even further problems covering fixed costs, Professor Hartley said.
Ultimately, the solution was to ensure fixed charges by retailers that covered relevant costs, he said, a policy state Treasurer Ben Wyatt made moves towards last year.