When it comes to dodging the taxman, many big corporations have it down to a fine art.
Now, a new approach to tax promises to go far in resolving this issue by taxing a company’s cash flow instead of its reported profit.
The plan was unveiled last week at an economic forum by former Labor politician Craig Emerson, together with economists Ross Garnaut, Reuben Finighan and Stephen Anthony.
In the extensive report, they argued that the current corporate tax system is in urgent need of reform and should be replaced by the so-called ‘cash flow’ model.
They say their proposed system would boost investment and innovation, level the playing field between smaller businesses and global corporations and reduce tax avoidance from multinationals.
Under the current system, global corporations can avoid paying tax using a number of wily strategies, such as shifting profits overseas or into debt interest products, such as bonds.
By forcing corporations to pay tax on their cash flow instead, Australia would gain up to an additional $39 billion in tax revenue a year, the report claimed.
“These concepts have been around for a while,” Emerson told TICKY in an exclusive interview last week.
“Way back in 1948, there was a proposal like this, but no one’s ever said how would you implement it.”
Critics of the paper say the changes would be too extreme.
But Emerson argues their paper has found a way to implement the system without creating a shock effect.
“Our proposal is you’d reduce the company tax rate by three percentage points a year, while introducing the cash flow tax at three percentage points a year. After 10 years you’re done,”
“What we’ve tried to do with the cash flow tax is to completely replace the company income tax.”
The paper highlights a number of problems to the current system, including reductions to the corporate tax rate in recent years that have failed to attract additional foreign investment.
Industry Super chief economist Stephen Anthony says that a cash flow tax model would remove economic distortions, such as the benefits that corporations get by moving profits into debt by allowing deductions.
“Taxing cash flow, and therefore, economic rent, improves the trade-off between revenue collected and welfare enhancing investment,” Anthony said in a statement.
“A cash flow tax is relatively simple to administer and removes distortions like the promotion of debt over equity which undermines economic stability.”
Watch the discussion from TICKY in the video above.