Globalisation and the dilemmas of income taxation in Australia

Abstract

Over the past two decades there has been a worldwide fall in statutory corporate tax (CT) rates. Focusing on Australia, this article establishes three empirical facts which challenge much of the existing literature. First, CT competition was the crucial driving force behind CT cuts. Second, policy makers had to abandon tax‐related investment incentives in order to pay for lower CT rates. This broadening of the CT base is costly, because it potentially disadvantages domestic firms and may, over the longer term, erode the CT base. Third, CT cuts have put pressure on the personal income tax base, as low corporate rates provide tax avoidance opportunities for high‐income earners.

Notes

Under the existing regime (2003–04), average personal income tax exceeds the 30% corporate rate for incomes above $68,000 per annum.

Income tax cuts and the introduction of the GST were also linked through the budget constraint. In the lead up to the 1996 poll, the Howard government had specifically ruled out introducing a GST, which meant that it had little scope to offer income tax cuts during the first five years in office. In 1997 the government, desperately trying to establish its economic reform credentials, championed the cause of tax reform, with a GST as its centrepiece. While the decision was largely a response to pressures from business and industry for comprehensive tax reform (Eccleston 2000), the need for further income tax cuts certainly played a role as well. The objective was to broaden and modernise Australia's consumption tax base and to use some of this revenue to finance cuts in personal income tax rates.

In the 2002–03 federal budget these thresholds were increased to $52,000 and $62,500, respectively.

Steffen Ganghof is Research Fellow at the Max Planck Institute for the Study of Societies, Cologne, Germany. He has recently published (in German) a monograph on the politics of German income tax reform in comparative perspective and an edited volume on analytical approaches to the German political system. Richard Eccleston is a Lecturer in the Department of Politics and Public Policy at Griffith University. His book The Thirty Year Problem: The Politics of Australian Taxation Reform is being published by the Australian Tax Research Foundation. The authors thank Brett Freudenberg and this journal's anonymous referees for their very helpful comments, and Miro Bogner for able research assistance. An earlier version of this article was presented to the 2003 Australasian Political Studies Association Conference.