Investment subsidy is better than company tax cut, Australian research suggests

Recent Australian research shows that a subsidy for companies can boost investment in the country by two to three times more than corporate tax cuts, with bigger flow-on benefits to wages. Subsidy will result in “evenly spread response,” while tax cut “skewed toward foreign investors,” the study has found.

Janine Dixon and Jason Nassios, academics from Victoria University, conducted the study, which was released on Tuesday. It will be presented at the Melbourne Economic Forum, The Guardian reports.

The study measures the efficiency of investment stimulus policies in Australia. Although it supports claims by the Turnbull government that company tax cut can boost wages and employment, it has learned that the superior option is an investment subsidy.

The research also shows that the government could cut company tax by 3.8 percent or give an investment subsidy of 1.6 percent for a fixed budgetary cost of $5 billion. Dixon and Nassios learned that the “investment subsidy is between two and three times more effective as a stimulus to investment than the company tax rate cut.”

According to the researchers, the investment subsidy “enables the full $5bn package to be deployed on increasing post-tax rates of return on capital and inducing a relatively large investment response.” The company tax cut, on the other hand, has limited effectiveness when it comes to changing the post-tax rate of return for overseas investors.

Both policies will result in boosts in employment, real pre-tax wages and gross domestic product. But based on the study, a company tax cut would boost wages by 0.3 percent by 2036. This is less than the expected boost from investment subsidy, which is 0.6 percent.

Aside from fuelling higher investment, an investment subsidy would guard the revenue stream on legacy capital. Last month, the government delayed cutting the tax rate to 25 percent from 30 percent over 10 years for companies with revenues over $50 million.

Wage growth in the country is still near the lowest levels on record. Australian Bureau of Statistics (ABS) data shows that the average hourly wage rates rose by only 0.55 percent in the December quarter in 2017, leaving the change on a year earlier at 2.08 percent.

For private sector workers, wages lifted by 0.48 percent over the quarter, leaving the change on 12 months earlier at 1.93 percent. Public sector wages grew by 2.44 percent. Those working in the private sector are included in the country’s largest employment group.