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Standing Committee on Economics
31/07/2018
Impediments to business investment

RYNNE, Mr Brendan, Partner, Economics and Tax Centre, KPMG

SIMPSON, Mr James, Partner, KPMG Law, KPMG

SURETTE, Mr Ted, National Industry Lead, Energy and Natural Resources, Management Consulting, KPMG

WARDELL-JOHNSON, Mr Grant, Partner, Economics and Tax Centre, KPMG

Committee met at 09:15

CHAIR ( Ms Henderson ): I declare open this hearing of the House of Representatives Standing Committee on Economics. This is the committee's first public hearing for its inquiry into impediments to business investment. Business investment makes a significant contribution to Australia's economy. Investing in new, productive capacity creates employment, raises future incomes and creates new innovation. In November last year, the RBA reported that there has been a solid upward trajectory in non-mining business investment over the past couple of years. This growth has mainly been in the services sector. While this pick-up in non-mining business investment is encouraging, it remains vital to examine what government should be doing to better support and encourage business investment. The inquiry will provide the committee with a valuable opportunity to obtain business and stakeholder perspectives on the challenges businesses are facing. The committee aims to better understand what aspects of the current arrangements are impeding business investment growth in Australia and how government can help businesses to overcome these obstacles. The committee will hold its next hearing for the inquiry in Melbourne tomorrow. Hearings are also scheduled in Canberra over the coming weeks.

I would now like to welcome representatives of KPMG. Do you have any additional comments on the capacity in which you are appearing?

Mr Wardell-Johnson : I am the tax leader at KPMG.

Mr Surette : I am also KPMG's global leader for power and utilities.

Mr Rynne : I also have the role of KPMG's chief economist in Australia.

Mr Simpson : I lead the firm's workplace and employment law group.

CHAIR: Thank you very much gentlemen and, again, welcome. Although the committee does not require you to give evidence under oath, I should advise you that these hearings are legal proceedings of the parliament and therefore have the same standing as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. I now invite you to make an opening statement before we proceed to discussion.

Mr Wardell-Johnson : Thank you, Chair. I'd like to make a comment in relation to the importance of this inquiry and, indeed, congratulate you on the time that you've devoted to it. It affects not only the people in this room but future generations, so business investment is quite a critical thing. It's also a difficult and tricky area of policy setting. There are so many balancing elements—social, economic and environmental elements and questions of contributive justice and distributive justice.

We in Australia actually have a wonderful Federation but suffer difficulties in relation to that. It's interesting to compare Australia with California. We have 60 per cent of the population of California, but we have not only the federal government but six states and two territories, leaving aside the minor territories, and about 560 levels of local government. California, by contrast, has about 58 levels of local government plus itself. So our Federation presents us with difficulties. There is a question as to whether we have the right political infrastructure in relation to that Federation, whether we need enhanced cooperation and whether we possibly need a COAG with a permanent secretariat rather than having one that has an agenda which is one of the Prime Minister of the day.

We come here in a particular spirit, and that spirit is to contribute to the ideas surrounding this discussion. That spirit is very much part of KPMG's sense of thought leadership. Part of our DNA is the obligation that we feel to contribute to the community in that area of thought leadership. I've personally been involved in a piece on tax reform, one on solving the budget deficit and recently one in relation to igniting the Indigenous economy. But many in this room, and others, constantly contribute to a domain of thought leadership. Ideas have a vintage and they're plucked in particular ways. Some of them have multisector support, others just form seeds and some of them wither in light of hyperpartisan.

We have presented 17 ideas. They cover areas such as: the relationship between business and higher education and how that might be improved; the high effective marginal rates that second earners, generally women, suffer in relation to the interaction between our tax system and our transfer system and childcare costs; maybe forming a bright-line test between employees, independent contractors and a third bucket that exists, which is a deemed employee bucket; and the importance of stability in relation to energy policy. They are just four of the 17 ideas that we've presented. We're here to assist you. We hope that this is conducted in the spirit of that assistance and that you choose ideas that maybe can be taken forward.

CHAIR: Thank you very much. You mentioned the issue with partisanship in relation to some of these big-picture ideas and policies. There has been a lot of discussion about company tax cuts in the last 24 hours. Of course previously, up until a number of years ago, there was bipartisanship on the importance of lowering company tax. Could you perhaps talk to the committee about that issue. How do you see the importance of company tax cuts playing in the Australian economy, particularly for business investment, employment and, on the ground in every community across Australia, jobs growth?

Mr Wardell-Johnson : I will commence and then I might hand over to my colleague, the chief economist, to address some of that. KPMG have been quite clear that we support company tax reductions. We believe that, in the current world, particularly with the US company tax rate falling to 21 per cent, we are going to become increasingly uncompetitive unless we cut company taxes. We appreciate it's a very difficult issue in the community. It's difficult for a number of reasons. One is that the benefits of company tax reductions are not instant; they occur over a long period of time. The second is that it is possibly counterintuitive to most people that company tax cuts will result in higher real wages in the longer term. The extent to which that occurs is contentious. That it occurs is not contentious. Former Treasury secretary Ken Henry said, 'That's public economics 101.' It occurs because you end up with higher foreign direct investment, you end up with capital deepening arising from that higher foreign direct investment and you end up with higher productivity as a result of that and that flows through to higher real wages.

The third area which is difficult for many people to follow is that, given our imputation system, company tax reductions basically favour non-resident investors into Australia. The drive is to increase that level of foreign investment into Australia and many see this as an Australian versus non-resident dichotomy. But, if we want the Australian economy to be competitive in the long term, I believe and KPMG believe that company tax reductions are an important part of that.

Mr Rynne : KPMG were engaged by the Commonwealth Treasury as part of the tax white paper process to provide independent macroeconomic modelling to look at various tax reform scenarios that were presented to us. The basis of those tax reforms scenarios was essentially reducing the corporate tax rate from 30 per cent to 25 per cent. That reduction in the company tax rate was funded via different scenarios. So, in effect, there was no additional impost to the Commonwealth budget associated with those tax reform scenarios. There were three different scenarios that we modelled. I'll just read some of the statistics out to you that came through our analysis. In essence, we found that a reduction in the company tax rate from 30 per cent to 25 per cent over the long run would increase real GDP by between 0.6 and 0.8 of a per cent. It would increase the capital stock of Australia by 1.6 to 1.9 per cent. It would increase labour—the total employment—by 0.1 to 0.2 per cent. And it would increase after-tax real wages by between 0.8 and 1.3 per cent.

One of the main drivers around company tax reform and why you get these positive benefits is associated with a change in the tax mix. We all know that taxes are, by their essence, distortionary. Some taxes are more distortionary than others. It's measured by what's called the marginal excess burden. As part of that engagement with Treasury, we modelled at that point in time what each different Commonwealth and state tax marginal excess burden was. At that point in time, the marginal excess burden for company income tax was about 35 per cent, whereas for personal income tax and GST it was about 20 per cent and 22 per cent respectively. So anything that changes the tax mix that has a bias towards a higher marginal excess burden to a lower marginal excess burden will result in an overall increase in welfare to an economy, all else being equal.

CHAIR: You talk about the dangers of us becoming less competitive and that, in fact, if Australia doesn't take action—and of course the government already has taken very significant action—in lowering company tax, we are going to be standing out more and more in the context of other OECD countries with a very comparatively high tax rate. What's the impact on the ground? Those Australians who are listening to this inquiry this morning have heard those very compelling statistics, but what's the impact on the ground in terms of people's jobs and the future of their families if we become increasingly uncompetitive?

Mr Wardell-Johnson : In some sense, the future is a long-term future. Unless we do something with a view to being competitive in the long term, we will slowly find our industries less competitive in world markets.

CHAIR: What does that actually mean when you talk about being less competitive? What's the impact of that?

Mr Wardell-Johnson : The impact will be that foreign investors will choose to invest in other countries rather than Australia in the future and something that won't be seen that will be missing in people's lives—something that is a counterfactual, if you like—is actually increased jobs, higher real wages and increased welfare.

CHAIR: Will that increase the incentives for companies currently based in Australia to move offshore?

Mr Wardell-Johnson : It can do. Clearly if you increased the company tax rate it would mean that companies would actually say, 'Hey, look, maybe we're better off in other jurisdictions rather than in Australia.' So the logic of that is that, given the fact that our tax rate is becoming relatively higher, it will actually result in companies considering where they should locate. There are many other factors that would go into where companies locate but—you're right—that's one factor that's taken into account.

Mr Rynne : Just to further reiterate that point, investors ultimately look for a target post-tax return on equity. Simply, that's the number that investors look for. Ultimately, though, the investment return still comes down to the underlying economics of the proposition itself. Tax matters, but it matters at the margin. Where an engagement or an opportunity occurs within Australia versus overseas, if those rates of return on a pre-tax basis are exactly the same, or the risk factors are exactly the same but the only ultimate difference is a difference in the tax rate, then that may sway an investor to choose the jurisdiction that has the lower company tax rate, all else being equal. But ultimately an investor is seeking to maximise their post-tax return on equity, and the largest component in that is traditionally the pre-tax return. So tax matters, but it matters at the margin. So, from Australia's perspective our attractiveness in getting capital into Australia is still ultimately a matter of the underlying proposition of the investment within Australia, and I still believe that's very strong.

CHAIR: Are you concerned about a policy—and I'm referring to Labor's policy—that would prevent the company tax rate for small and medium businesses falling below the current rate of 27.5 per cent?

Mr Wardell-Johnson : My perspective is that we need to reduce the company tax rate for all businesses, and the delineation between small and medium-sized businesses and large businesses is not economically driven; it's politically driven. So the short answer to you is that we need greater foreign direct investment in Australia. Large businesses are a major component of that, and that's the direction in which we should go.

CHAIR: But what about that floor that has been set by the opposition of 27.5 per cent? As you're aware, of course, our policy and our plan is to reduce company tax to 25 per cent.

Mr Wardell-Johnson : We would support a reduction to 25 per cent for all businesses.

CHAIR: Thank you very much, gentlemen.

Mr THISTLETHWAITE: Mr Rynne, I want to ask you a couple of questions. You made the point that what's relevant is the effective rate that's paid at the margin. In terms of Australia's competitiveness, as I understand it, there are a number of factors that go into that, not just the headline rate.

Mr Rynne : Correct.

Mr THISTLETHWAITE: In particular, there are issues such as capital depreciation and other factors like the amount that can be deducted through asset write-offs. Can you just explain for the community that it's not just the headline rate that goes into that issue of paying tax at the margins and the additional amount that you pay on every dollar invested.

Mr Rynne : Your point is absolutely correct. It's really the effective tax rate that's most important. Without having the numbers in front of me—but I remember having a look at them just recently when I was commenting on the most recent federal budget—when you compare Australia's headline company tax rate of 30 per cent, our effective tax rate, I think, is in the order of about 23 or 24 per cent. When we compare the headline tax rate of other jurisdictions who have a lower headline tax rate, the differential between their headline tax rate and their effective tax rate is sometimes not as large as that differential in Australia. There is a squeeze between other jurisdictions' effective tax rate and their headline tax rate.

But, in saying that, my recollection is that, even after considering those issues, our effective tax rate is still higher than the rate in what you would consider to be jurisdictions with which we compete for the global flow of capital. More recently, we've had a look at the standing of Australia and where we sit globally from a tax-competitive position. There was a publication produced in the US by the Tax Foundation called the International tax competitiveness index, and overall that places Australia, out of 35 countries, at seventh place in its total tax system. When it looks at its company tax system, its corporate tax system, however, our standing falls from seventh to 25th out of the 35 countries. So, overall, there is a view presented by the Tax Foundation that our tax system in general is relatively well-placed, but we are towards the lower end from a corporate tax competitiveness perspective.

Mr THISTLETHWAITE: I'm looking at a study that was published by the United States government Congressional Budget Office in 2017 which did a similar thing. I'm specifically looking at corporate tax rates. When it came to average corporate tax rate and effective corporate tax rate, taking into consideration things like deductibility, asset write-offs, franking dividends and the like, Australia actually ranked lower than the United States in both areas, in terms of the effective rate of tax—in other words, the additional dollar that is paid on the margins. So, if you look at it in that respect—the effectiveness of the tax rate—we're actually more competitive than the United States, according to this study that was produced by the United States government.

Mr Rynne : I'm sorry; I'm not aware of that study. However, one thing I would note is that, if that's a 2017 study, since then the United States has implemented significant tax reform, and we have referred to that as game-changer tax reform. The tax reform that is being processed through the United States is incredibly significant, both from a headline rate perspective and as to individual tax treatments. Without knowing that study and without knowing those numbers, I would suggest that, if we were to re-rank that analysis today, there would be a different outcome compared to that, but that's because the US has moved down so dramatically in relation to its tax rates.

Mr THISTLETHWAITE: Mr Wardell-Johnson, what has that done to the United States' budget deficit projection?

Mr Wardell-Johnson : It has significantly blown out the budget deficit by about $1.4 trillion over 10 years for the whole package. A significant component of that is the reduction in the company tax rate, but there are other components. There are three major changes of their international tax rules that contribute to that as well. I have a vague recollection of reading the US budget office analysis of effective tax rates, and I'm not sure of the extent to which they take into account the Australian imputation system—which might actually add to your argument. But if you take our tax system and the imputation system together, then you draw a conclusion that the importance of a low effective tax rate is what happens as to nonresidents, and my understanding is that the US congressional office looks at the whole of the system rather than just the impact on nonresidents. And, if you've got an imputation system, it's the nonresidents and how they're taxed that's actually quite important.

Mr THISTLETHWAITE: A lot of international economics bodies and indeed the Reserve Bank at the moment are saying, given the uncertainty in the international economy and given that we've just come out of the global financial crisis, that now is the time for fiscal consolidation—in other words, buffering up your fiscal systems for the next shock. It's not the time for fiscal expansion, if you like. What's your view on that approach? Is that the correct approach?

Mr Wardell-Johnson : I note that there seems to be minor difference between the Reserve Bank's view and Treasury's view in relation to that. My view is that you need to have your settings in relation to company tax for the long-term. That is, foreign investors will look at this; they'll have long-term plans, 15-year plans, and so that's where the settings should be. If you looked at the level of excess cash in the world and you took a very short-term view, you might hold a view that says, 'Let's just wait until things change on a global basis before we do something.' That's not a view I hold.

Mr THISTLETHWAITE: I want to move on to something else. It appears that Australia has made an art form, over the last decade, of stuffing up energy policy! Perhaps one of you could give us your view on where we've gone wrong. I'm keen to know: of the advanced economies that are effectively making a good transition to renewable energy and cleaner fuels but keeping electricity prices down, which ones are the example economies that Australia should be looking at in terms of policy settings?

Mr Surette : Thank you for that question. There has been a lot written in the last 12 months on how we have arrived at where we have arrived, in Finkel, ACCC, Energy Security Board. We had a report by the International Energy Agency on Australia's energy situation. They point to common causes. Those causes have been policy uncertainty; dramatic increases in network costs; more recently in the last 18 months there have been rises in wholesale energy cost; and also one of the factors has been a dramatic rise in gas prices. So there is a blancmange of many situations, with many causes of rising energy prices. Currently the situation is very much topical every day of the week, with the National Energy Guarantee. The National Energy Guarantee promotes three things. It's aiming to make energy affordable, reliable and to meet emissions goals. To your question around other countries—you would note that my accent is North American; actually I am originally from Canada—other countries do not have the policy uncertainty that we have. They do not have the prices of electricity that we have. When I go home right now my family pays less than a third of what we pay. Some of that is clearly affordable energy, and they're also making a transmission to a greater level of renewables. But the core point is an orderly transition. That is what Australia needs.

Mr THISTLETHWAITE: Mr Wardell-Johnson, you mentioned the effective high marginal tax rates, in particular of women returning to the workforce. Do you want to expand on that?

Mr Wardell-Johnson : It's the interaction between the tax system, the transfer system—family benefits, child benefits—and child-care costs. That means that if, for example, you have two full-time equivalent family members earning $100,000 each, one on three days and one full time, if the person, usually the woman, moves from three days to four days, the additional benefit that that person gets is less than the minimum wage. If they move from four to five days, they actually end up paying in $10 an hour. We've done a report recently, and we doing further work in relation to that. It's called the gender pay gap. That's a structural issue that I think needs to be addressed. It's a long-term structural issue in terms of female participation rates and maternal participation rates in particular. There is not only an economic dimension to it—there are cultural dimensions to it. If you look at the Netherlands, the Netherlands seems to have a very high—comparatively high, anyway—rate of male part-time workers in the child-bearing years. That seems to give rise to higher female participation rates or maternal participation rates, which leads to greater productivity. I think getting those settings right is an important element of our future.

Mr THISTLETHWAITE: That report that you just mentioned on the gender pay gap, has that been released?

Mr Wardell-Johnson : It's a public document.

Mr THISTLETHWAITE: What do you advise the committee is the solution to a problem like that?

Mr Wardell-Johnson : Firstly, there has been change to the way in which child-care subsidies work in recent times. That has actually improved the situation. But more could be done so that you eliminate or reduce these high effective marginal tax rates. Sometimes they can end up near 100 per cent. If you pulled it back so that it was around 50 per cent there would be some cost in relation to that, but the benefits of additional productivity would be significant.

Mr THISTLETHWAITE: You mentioned in your opening statement the issue of the foibles, if you like, of Federation, such as the different tax rates. One that's often cited is payroll tax. You mentioned a COAG process of a permanent secretariat. Do you want to expand on that. How do you envisage something like that working?

Mr Wardell-Johnson : I think we've got some long-term problems that we need to think about, not only health and education but a whole array of things, including infrastructure. We don't have a political infrastructure that looks at these things in the long term on a federal basis. I would have recommended that COAG should have a permanent secretariat and that the agenda should be partly set by the premiers and partly set by the Prime Minister of the day. I think that political infrastructure would be very beneficial. I love our Federation; I think our Federation is fantastic. I'm a strong supporter of horizontal fiscal equity, and I think we do a much better job of this than the US, in particular, but also Canada. But we need something else to help us solve longer term problems.

Mr EVANS: Thanks for being here today and for your very interesting submission. I'm going to come to a couple of the specific recommendations in a moment, but I want to ask a couple more questions around effective rates of taxation. Mr Rynne, I want to pick up on some comments that you made in relation to some earlier questions. I've got in front of me a copy of an Oxford University Centre for Business Taxation study which basically reinforces everything that you were saying about the differential between Australia's effective rates of taxation and our competitiveness. Are you aware of that study?

Mr Rynne : No, I'm not, but I'm pleased to hear that that item saw a result.

Mr EVANS: Broadly, the point that you're making—that the differential is certainly still there and that it's getting larger over time—is pretty much borne out in this study, so I just wanted to draw out that point about the competitiveness question being still a very, very critical one and probably getting more critical over time. Can I just ask a slightly different question. Most of our discussion here today has been around foreign investment and the incentives that effective tax rates and competitiveness can play. What about the other side—domestic investment and the incentive that lower tax can play in encouraging more domestic investment? Can I get you to make a couple of comments there.

Mr Rynne : Just to reiterate the statement I made earlier, ultimately investors are looking to maximise their post-tax return to equity. Tax matters but it matters at the margin, and so ultimately it's about understanding the pre-tax investment opportunity and whether those investment opportunities meet the investor's own internal hurdle rate. Is the return for their investment going to meet their own target rate of return for the use of that capital that they're wanting to invest? It's net cash flow, so it's not only the revenue they have but also the expenses that they incur. So it's about understanding through different sectors what those investment opportunities are on a net cash flow basis. I still believe that there are many good opportunities within Australia for continued investment and that the tax rate does matter, but it probably matters a little bit less for domestic investors who don't have a propensity to look for offshore investing but are really looking for onshore investing, but it's probably, and this is my opinion, a more-binary decision as opposed to whether you invest or not and as opposed to whether you invest here or there.

Mr EVANS: I guess that that ties into questions about confidence, stability and predictability.

Mr Rynne : Correct.

Mr EVANS: In the broader tax debate that's playing out in society at the moment, obviously we wouldn't want a position where one of Australia's major political parties was chopping and changing its policies, leading to that sort of instability and unpredictability. This is about long-term predictability and stability, having a target and trying to work towards achieving that target over the longer term. Can I just ask you a little bit about what confidence and stability looks like from the perspective of an Australian investor at the moment. What are the trends there?

Mr Rynne : How that confidence and stability should be picked up within the marketplace is through different financial parameters that get built into that pre-tax return on equity. The first thing is the 10-year bond rate, the risk-free rate. Where there are concerns about instability within a country, you would imagine that risk-free rate, the 10-year bond rate which an investor would invest in, would rise. The other component in there would be the market rate of return that an investor would want to achieve in investing within a share market, for example. This is basic capital asset pricing model analysis. Both of those components would reflect the market's perception of long-run stability within a country. That would not only be political stability. It would also reflect a whole range of other economic matters: population, access to infrastructure and all of those components that would be built up within that return. They would be more associated with the pre-tax return—recognising that there would be some overlap to understanding what the tax rate would be—than necessarily with the post-tax return, because that's on an after-tax basis. But the stability and confidence should be shown through the market parameters like the 10-year bond rate—the risk-free rate—and also the market risk premium associated with investing.

Mr EVANS: Can I get you to just confirm that you do make that link and that, to the extent that we look in the statistics at the moment and see that business investment is growing again in Australia in the non-mining sector, albeit off a low base, you believe that that's because you see that stability and confidence return.

Mr Rynne : Yes, I do. You are seeing that within the risk-free rate. We're in an interesting position where our risk-free rate is below that of the US. It hasn't been that way since, I think, about 1996. That may be wrong, but I think it's that sort of time frame. What that means is that there's a relatively low cost of capital in Australia at the moment, a lower hurdle rate, and therefore you would expect more investment to be occurring.

Mr EVANS: Thanks for that. I have just one follow-up question for Mr Wardell-Johnson. You were asked some questions before about the impact of reduced company taxes on the American budget. Can you just confirm that your understanding of the Australian situation is that the budget repair that's happening at the moment entirely factors in Australia's proposed company tax cuts.

Mr Wardell-Johnson : You're asking questions about the forward estimates and projections in relation to that. My understanding is that the current forward estimates take into account the government's current policy proposals, as you would expect.

Mr EVANS: So there is a big difference there in the Australian scenario compared to the American scenario?

Mr Wardell-Johnson : That's correct.

Mr EVANS: Can I just ask one question in relation to a very specific proposal that's in your submission. I wanted to ask you to explain a little bit more about the innovation company tax regime that you propose. I just wanted to get somebody to outline that a little bit more and talk about what it means.

Mr Wardell-Johnson : Sure. Under the current government's innovation policy, they have broadly adopted a UK regime for providing incentives for start-ups, which was to give mums and dads, if you like, a tax benefit, which was a 20 per cent non-refundable offset with a maximum of $200,000 as an encouragement to invest in, basically, start-ups or early innovation companies. An alternative regime would be to allow losses to be transferred from companies to a similar start-up regime for cash on the proviso that that investor, the company transferring the losses, would also invest a multiple of that loss transfer amount. That gives cash to start-up companies. You'd have requirements surrounding that, which would mean that the start-up could only use that cash for salary and wages, and you'd have other caps et cetera. But what you would do is you'd effectively encourage high-net-worth individuals, and many of them hold cash in companies to invest, rather than the mums and dads to invest. I think that would be a better way of trying to deal with a problem that we have at the present time—that is, as soon as companies reach a certain size they tend to go to the west coast of the US or elsewhere because they can't get the investment dollars from a particular sort of band within society. I would advocate both. I can understand why the government chose to adopt the UK model, because it has certain runs on the board. But I think we could be imaginative in other things that we could do.

Ms KEARNEY: It's hard to know where to start but I think that I'd start with you, Mr Rynne, and your interesting research. You said that shows that the corporate tax cuts over time would play out very positively in a lot of areas. I'm interested in what is actually the long run. What do you consider a long run? What period of time? And was there in the survey an impact on the loss of revenue which would result in perhaps a lack of government investment in important infrastructure that businesses rely on like, for example the NBN, or skills acquisition—schools, education—or indeed healthcare? And was there any thought given to the impact on businesses of an inability of a government to actually invest in those important social infrastructure things?

Mr Rynne : That's a very interesting question about how to define the long run, being it's a much debated topic. In theory, it's about once the economy resettles and reaches its equilibrium point again. In practice, people generally refer to 'after about 10 years' as the rule of thumb common explanation.

What we found during our modelling was that over the longer term that the budget remained in balance so that there wasn't an increased budget pressure with regards to funding alternative ways. How we did that was through looking at whether the taxes increased that personal income tax levels so there's a shift—that's because of that marginal excess burden component—or that there's a reduction in government expenditures that matches those increases as well. And what we found was that investment follows like an impulse response—the reduction in the company tax rate reduces or increases out after tax rate of return relative to the rest of the world. That causes investment to be stimulated. More investment piles in to Australia because the capital base increases, your returns start to normalise and then it comes back down to normal investment profile. So, in fact, what happens is that investment increases within the shorter term to therefore allow a higher capital stock going forward.

Ms KEARNEY: Have you got any examples anywhere in the world of where this has actually played out? Because Mr Wardell-Johnson said that a lot of this is very contentious and doesn't actually play out in practice.

Mr Rynne : So I think that you're seeing a live social experiment in the US at the moment, where this is actually happening.

Ms KEARNEY: With a $1.1 trillion in the budget blow out ?

Mr Wardell-Johnson : It is $1.4 trillion, the overall package, over 10 years.

Mr Rynne : However, there's a reflection in there as well as increased government expenditures on things like defence that are influencing the US budget position at the moment. There was a quote that I read recently—and I haven't read the source document itself—that said that US Treasury receipts in April were 12 per cent higher than they were 12 months previously. The argument that is generally put around the Laffer curve is that the higher the tax rate the lower your economic activity occurs because it disincentivises organisations and businesses to invest and continue to grow. Therefore, you reduce the company tax rate or those tax rates as you actually stimulate economic activity, and that stimulation and economic activity is greater than the loss associated with tax revenues and, because the base is now broader, you actually generate more tax receipts. That appears to be the case that's occurring within the US.

Ms KEARNEY: It will be interesting to see if that plays out, because a lot of research actually shows that it just creates greater inequality—that profits increase and not a lot of it goes back into public infrastructure public spending and, indeed, that wages don't rise at all. Rising wages drives the economy's stimulation, which we have a great problem with here in Australia right now.

Mr Rynne : We've just done some work recently—and is a couple of years dated—looked at wage inequality in Australia using the Gini coefficient analysis. We looked at it on three different bases. The first one was just market income—so just wages within Australia. We then looked at it as household income pre-tax and then household income after tax. That household income takes into consideration transfers from the government and then household income, but, after tax, it's transfers and taxes paid. What we found was that the Gini coefficient reduces consistently between those three measures, which actually shows that Australia's tax and transfer system helps quite markedly in improving income inequality within Australia. So it's more than just looking at what the market wage rate is; it's in fact understanding the whole tax and transfer mix and how that influences equality within Australia. The overall Gini coefficient after tax and transfers from a relative global position is still reasonable. It's not fantastic but it's reasonable.

Ms KEARNEY: Of course, the Gini coefficient isn't the only indicator of inequality in Australia at the moment. There is a lot of discussion about whether or not that's effective. In fact, another survey came out today which shows that inequality is in fact growing again in Australia. So there are lots of different measures. I am not saying the Gini coefficient isn't reputable; I'm just saying that it's not the only indicator of inequality.

Mr Rynne : Alternatively, I understand that the HILDA survey results, also released today, show a different result again to the ACOSS study that was released today too. The ACOSS study says that there's been a rise in inequality and the HILDA survey says that there's been a reduction in inequality.

Ms KEARNEY: I think what we're saying is that there's no definitive thing here, and that what people out there on the ground are feeling is really what we should be driven by—which perhaps explains why they would be concerned about $80 billion dollars in tax cuts going to large corporations instead of being spent on social infrastructure, which is also a great driver of productivity and a healthy economy.

Mr Wardell-Johnson, I am interested in your comment that there should be corporate tax cuts across all small and large businesses and that you don't really see any difference. Is that right? Can you explain why you think there's no difference between a small to medium enterprise and a large enterprise when it comes to the need for tax cuts?

Mr Wardell-Johnson : There are very significant differences in terms of how different classes of business invest, whether you have a foreign cost of capital or you have a domestic cost of capital. Small businesses, because of certain tax rules, are quite different again in terms of their sensitivity to the corporate tax rate. But the biggest driver for increased welfare is actually foreign investment, and that's from the larger sector. Our imputation system is part of that. So, if you have smaller businesses that pay less tax at the company level, if the dividends are actually distributed, they will be caught up at the shareholder level. That said, there are still benefits at the small end of the market because of timing differences and the way in which profits are not fully distributed and how that it interacts with the capital gains tax system. But an economist would not. Apart from the foreign investment element, an economist wouldn't distinguish on size, just to the efficiency.

Ms KEARNEY: Do you think there is an argument to say that a very large company that operates globally, for example, can have a tax bandwidth target where it might pay a little amount of tax in one country and therefore can absorb a higher level of tax in another country where it operates? It gives it a bit more capacity to manage its taxes, that a small to medium sized enterprise wouldn't be able to do—or a larger company can afford the services of a wonderful organisation like yours to help them minimise tax. They have capacity to lend money to others. It's this whole business of the mother company in another country lending money to a subsidiary company and charging extra interest so that they can have the money. Large corporations have a lot more capacity to minimise tax than small to medium enterprise companies that only operate domestically would have. Therefore, there can be a difference in benefit to a small company.

Mr Wardell-Johnson : I would have said that's more true of the US in the past, and that's because of their foreign tax credit system. They could equalise taxes paid in different jurisdictions when they were remitted back to the US. I'd say that's less true of Australia and less true of most countries throughout the world that have a different type of participation exemption system, and it's less true of the US now.

CHAIR: The deputy chair has indicated he doesn't have any further follow-up questions. I've just got a couple of matters that I want to clarify and put on the record. The deputy chair referred to the US Congressional Budget Office study of international corporate tax rates. I've just done a bit of quick research. The CBO study uses tax return data from 2012, and I think that's a very important point to make. This is before many of the Turnbull government's measures were implemented, including its profit-shifting measures. So I'm not sure that we can, necessarily, rely on that, in terms of data that's now six years old. And I think it's fair to say that the Oxford University Centre for Business Taxation study, which looks to Australia's 2017 tax competitiveness ranking among OECD peers, puts Australia at 27 out of 33 countries—the seventh worst—based on 2017 data. I just wanted to make that point.

Mr Rynne, I also want to refer back to the KPMG study of the Trump tax cuts in the United States. You referred to this as a global game changer. My understanding is that the modelling to which you referred in your evidence earlier was prior to these latest tax cuts being implemented in the United States and that your paper has made it clear that if we do nothing there will be a negative effect on our GDP of 0.3 per cent or around 25,500 jobs here in Australia.

Mr Rynne : Correct.

CHAIR: Can you expand on that, please?

Mr Rynne : The analysis we looked at was to have a reduction in the effective tax rate, within the US, relative to no other changes. We use a global macro-econometric model, which we have in-house, and running that scenario showed that what you would see is a reduction in the—sorry, I'm just trying to remember. There would be exchange rate affects, and those exchange rate effects would change over time. The ultimate effect of that would be that Australia would be marginally less competitive as a consequence of these taxes and shaving 0.3 per cent off GDP over the longer term.

CHAIR: And that's 25,500 jobs, based on your report.

Mr Rynne : If my recollection is correct, yes. I released the report more than six months ago and I just can't recall the exact number, off the top of my head, I'm sorry.

Mr Wardell-Johnson : Brendan releases lots of reports!

CHAIR: This is a very fast-moving situation. Other countries are moving very quickly, and let's not forget the UK.

Mr Rynne : The UK has very low tax rates.

CHAIR: It is moving to 19 per cent.

Mr Rynne : Yes.

CHAIR: So we're seeing countries that are rapidly moving to rates below 20 per cent. Previously, of course, there was bipartisanship on the importance of reducing company tax, and now we're seeing a situation where the Labor Party will not move below 27.5 per cent. Even in recent months, as you've indicated in your report on the US tax cuts and the impact of those on Australia, that's having a further detrimental impact if we don't move. Putting aside the political argy-bargy that we're seeing at the moment, how important is this in driving business investment and growing jobs across our economy?

Mr Wardell-Johnson : In my view, very important for the long term. I agree with Brendan that 21 per cent is a game changer, but in fact the US have introduced other rules that make their effective tax rate on exports even lower. They're called FDII rules. So it's not a comparison between 30 and 21 per cent; it's a comparison between 30 per cent and something lower than that.

CHAIR: Do you know what that figure is?

Mr Wardell-Johnson : It is 13.125 per cent. The acronym is FDII. Basically, they provide a low rate for returns, effectively, on intangibles where something is exported as a good or service. So it's designed to encourage investment in the US rather than outside the US. It's complex. There is a query on whether it's in breach of WTO rules and on what the US attitude is to WTO rules. But I just put to you that, to answer your question, it's really important for us in the long term. Yes, it's 21 per cent, going down to 19 and then 17 per cent in in the UK. That's the general trend, and it's a comparative game. The US is not just 21 per cent; there are other dynamics.

Mr Rynne : Just to give you a practical example of that, if there's a US subsidiary in Australia and that US subsidiary looks after New Zealand, for example, and sells directly into New Zealand, with these new tax rules in the US it is now much more tax-effective for the US company to sell directly to New Zealand and stop that transaction occurring via Australia. What that does is to shift the corporate income from Australia to the US, reduce our company tax receipts in Australia and increase the company tax receipts in the US—albeit at a lower rate, but we lose that income completely.

CHAIR: Thank you very much for that clarification. I'd like to thank you all very much for your attendance here today. If you've been asked to provide additional material, could you please forward it to the secretariat. You'll be sent a copy of the transcript of your evidence, to which you can make corrections of grammar and fact. Again, gentlemen, thank you very much.