Tax Policy in Down Under

THE Rudd Government should scrap dividend imputation credits and instead reduce the company tax rate by about a third if it wants to increase investment in Australia, according to a tax expert and former Labor government adviser.

Nicholas Gruen, chief executive of Lateral Economics and Peach Home Loans, said dividend imputations — which allow companies to pass on to shareholders the benefit of Australian tax paid on profits — cost $20 billion a year but did not substantially improve a company's cost of capital.

Speaking at the Committee for Economic Development of Australia's tax forum in Canberra yesterday, Dr Gruen said imputation credits were an inefficient form of tax expenditure.

"The evidence suggests that it doesn't increase share prices," he said. "If you got rid of dividend imputations and spent the $20 billion on reducing company tax rates, you would make the shares much more attractive to foreign shareholders … The price would go up a lot and the cost of capital would go down."

Dr Gruen, who worked as an economic adviser to John Button as industry minister and John Dawkins when he was treasurer, said the $20 billion in tax revenue gained could then be used to lower the company tax rate from 30% to about 19%.

The Corporate Tax Association's executive director, Frank Drenth, and PriceWaterhouseCoopers partner Tim Cox expressed reservations about scrapping the system, saying dividend imputations helped the Tax Office monitor whether companies paid tax.

The forum also included a panel discussion on how to increase workforce participation. Australian National University research fellow and economist Andrew Leigh said Government should consider earned-income tax credits, which are used in the US and Europe. The credits are paid to low-income earners to provide incentives to work.

Ann Harding, director of the National Centre for Social and Economic Modelling, cited research released last year estimating that 910,000, or 7.1%, of working-age Australians faced an effective marginal tax rate of more than 50%. She said it was difficult to eliminate the problem, where people who earned more money faced the loss of government assistance.