A Closer Look
The Greens' recent proposal for a super-profits tax on excessive profits has sparked debate, with both business and government expressing concerns. However, the underlying principle behind the idea deserves closer examination.
The concept of a two-tiered system for company tax is not new. In 2011, then Labor Treasurer Wayne Swan's business tax working group considered it, and the Business Council of Australia itself proposed a similar idea in 2009.
The core of the proposal is a system where ordinary profits are taxed at a standard rate, while "above normal returns" are taxed at a higher rate. The threshold for "normal returns" could be set at the 10-year government bond rate, currently around 4%. This means any annual profit exceeding 4% of shareholders' equity would be taxed at the higher rate.
The rationale behind this approach is that in a perfectly competitive market, high returns on equity wouldn't be sustainable. New entrants would quickly enter the market and undercut excessive profits. However, in some industries, like banking, mining, and supermarkets, large and persistent profits exist due to barriers to entry.
The Greens argue that taxing these "super-profits" could be used to cut the tax rate for the majority of companies not making such profits, potentially even to zero. This would benefit many Australian businesses and encourage profitability.
Furthermore, a two-tiered system with a zero tax rate for ordinary profits would offer a technical advantage. Currently, the system incentivizes debt over equity, as interest payments are tax-deductible while dividends are taxed. A zero tax rate on ordinary profits would eliminate this bias.
While the Greens' proposal may be primarily aimed at generating media attention, the underlying idea has been seriously considered by experts for some time. The Business Council itself proposed a similar concept in the past, and the ANU's Tax and Transfer Policy Institute suggests a zero tax rate for ordinary profits.
While the Greens may not be in a position to implement their proposal, the concept of a two-tiered system for company tax deserves further exploration. It could offer significant benefits for Australian businesses and the economy as a whole.