Letters: SMEs key to supercharging our economy

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SMEs key to supercharging economy

The argument put forward by Jennifer Westacott of the Business Council of Australia that lowering corporate taxes will encourage investment is true, but flawed, as it is not the most efficient mechanism to save existing jobs, create new jobs nor generate tax revenue for the Australian government.

This is because lower tax rates tend to benefit big businesses more than small and medium enterprises (SMEs). Investment in SMEs should be encouraged over large businesses as they tend to allocate a greater proportion of their capital to employing staff and consequently generate more PAYG tax on every dollar invested.

The reason a lower tax rate benefits big businesses is due to Australia’s franking credit system, and because big businesses tend to have greater equity ownership by foreign investors. A lower rate will mean companies pay less tax but the franking credits they earn are commensurately less valuable. Consequently, lower corporate taxes only benefit Australian investors from the difference in the time value of money between when a company pays tax and when an investor gets the benefit of the franking credit, while an international investor receives the absolute value of the reduction in tax.

Franking credits also materially reduce the effective corporate tax rate to foreign investors, as franked dividends are not subject to withholding tax, thereby making Australia already one of the lowest taxed countries in the world.

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Opinion Letters - Oil Prices