Reform company tax to spark growth

1 August 2025 | Alex Robson and Barry Sterland

Throughout our history, rising capital per worker – what is known as capital deepening – has driven Australia’s productivity growth.

But since the Global Financial Crisis, non-mining investment has declined by 3.2 percentage points as a share of GDP.

The unfortunate reality is that too few companies are investing enough to expand and give Australian workers the tools and resources they need to work at their best. Fewer companies are starting up and thriving and creating jobs. And foreign businesses are setting up shop elsewhere.

As capital deepening has stalled, so has Australia’s productivity growth. This is not a uniquely Australian challenge. But our policy response to it is.

We need to make our own luck. If we want to adopt a growth mindset and improve the economy’s dynamism and resilience, we have to tackle structural problems like the decline in investment head on. To get investment moving again, what better place to look than Australia’s corporate tax system?

The current system taxes all profits in a similar fashion, regardless of whether they are in highly competitive industries, have different levels of risk, or operate industries subject to entry barriers and so earning higher ongoing profits.

It applies a lower rate of 25% to companies with annual turnover below $50 million, but other companies face statutory rate of 30% and effective tax rates that are high by international standards.

The treatment of depreciation, the approach to losses, and the different treatment of debt and equity financing also tend to distort or discourage investment.

Many argue, with some merit, that the heavy reliance on corporate tax receipts in the government’s revenue base leaves little room for reform.

But low investment and stalled productivity growth carry their own risks - to both tax revenue and overall living standards. If we don't get the economy moving, children born today may be the first generation not to have a better standard of living than their parents.

Is there is a better way to manage these risks?

In considering company tax reform proposals, many trade-offs must be confronted and judgements made.

Ultimately the priorities should be to lift overall investment, growth and productivity while maintaining broad revenue neutrality within the corporate tax revenue envelope.

The Productivity Commission’s proposed corporate tax reform package goes a long way towards achieving these goals by reorienting the corporate tax system towards one that better encourages investment.

First, we propose lowering Australia’s statutory company tax rate to 20 per cent for all companies with annual turnover of less than $1 billion. These companies account for the majority of Australia’s investment spending.

Reducing these businesses’ headline rate to around the OECD average will lower the tax rate on normal returns. It will encourage Australians to establish new companies, and to grow existing ones.

It will encourage established foreign companies to enter Australian markets, challenge incumbents, increase competition, and bolster dynamism and productivity.

Second, we propose introducing a net cashflow tax of five per cent that would operate alongside the existing company income tax system.

The net cashflow tax, which would apply to all companies, is specifically designed to allow firms to immediately deduct capital expenditure in the year in which it is incurred, thereby encouraging investment.

So under our proposal, all companies would be subject to a net cashflow tax of 5% and nearly all companies would face a lower statutory company tax rate of 20%. Even with this new cashflow tax, most companies would pay less tax than they do now. Those with a turnover greater than $1 billion might pay more, but they can mitigate this by investing back into the economy.

The overall economic dividend is positive. Modelling indicates that the reform package would be broadly revenue neutral over the medium term, and would increase investment by $7.4 billion, GDP by $14.6 billion, and productivity by 0.4%.

Why not immediately lower the tax rate for all companies? In principle, setting the cashflow tax at a higher rate would raise more revenue and provide scope for broader, deeper company tax cuts.

But theory and evidence suggest the $1 billion threshold will provide the biggest ‘bang’ in dynamism and investment for the government’s buck.

Starting the net cashflow tax at a modest rate will minimise unintended consequences.

Subsequent steps should involve growing the size of the net cashflow tax to fund broader effective reductions in company income tax, depending on an evaluation of the initial reform.

Reform is never easy, and transitioning to a better corporate tax system will take time.

But we believe our proposal strikes the right balance: it is a modest, serious and carefully calibrated first step towards a system that lifts productivity and puts economic dynamism front and centre.