The first point to make is that the way this tax reduction is being implemented is getting some bad press. This is because the smaller the business the sooner the profit tax rate will fall. 'Small businesses' will enjoy the cut first, defined as companies turning over (have revenue of) $10 million. That's up from $2 million.
Over the next few years that turnover limit will gradually be increased to $1 billion. Some have chosen to ridicule the use of the term 'small business' in this context. Clearly that is irrelevant - this is a supply-side measure to encourage investment and so long-term economic growth.
The issue is that Australia now finds itself with a relatively high corporate tax rate. This means the incentive to make Australia your base of operation is diminished. And the problem has got worse since the Henry Commission on tax reform recommended dropping the rate to 25% in 2010, over the period many countries have dropped their company tax rate even further.
So the Australian profit tax rate has become far less attractive over the period 2005 to 2015. This may be diverting potential Foreign Direct Investment from Australia and is leaving Australian companies a smaller pool of retained profit to reinvest in their businesses.
So the aim of the company tax cut is to improve the supply-side performance of the economy, raising the rate of economic growth (shifting the Long Run Aggregate Supply Curve to the right more quickly.
It is important to remember that supply-side policy is competitive too. Having a supply-side policy isn't enough, it has to be a policy that narrows the gap between you and the 'leader' otherwise they just get more competitive than you.
This article has equal relevance to IB and VCE students. VCE students need to know the detail of the tax cut exactly, but both groups need to understand the operation of supply-side policies.
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