There is no evidence that reducing tax will increase productivity, on the contrary there is evidence that decreasing company costs reduces productivity if we compare australia and New Zealand in the 1990s.

Australian commodities are still exported at a much lower price to holding companies in tax havens. Companies like Lucas were so inefficient they dragged the whole automotive industry down, in the days of 100% tariffs.

If we take Victoria as an example the drive to small government has lead to
1. privatisation of electriicty in 1992 - the electricity generator has warned of blackouts because of poor maintenance
- consumers have a choice of electricity retailers but you can't change when you feel like it, the companies shift customers around at their leisure
- the meter reading has been outsourced so one fella walks down a street reading all the meters then there is an electricity meter reading exchange
- this complexity is more efficient?

2. privatisation of public transport - we import rolling stock from France ie trams and trains - the trams are longer, seat less passengers and slower because it takes longer to open and close the sliding doors at tramstops
- trains are imported and more rolling stock will arrive in 2009

Public private partnership to build Eastlink resulted in a toll road that is more expensive than if the government raised the money on its own

Another legacy of the Kennett years is the way casual nurses are hired. In NSW contract nurses get their roster for the next fortnight, in Victoria nurses are rung at the start of the shift. A great way to reduce costs but no way to be employed.

Country Girl “imputation system, I am inclined to agree,”

Thanks CG, ultimately, there would be no imputation because, there would be no income tax paid by the company.

Re trap profits,

retained earnings (enhanced by lower taxes) is the alternative to extra commercial borrowings or new share issues.

Billie “decreasing company costs reduces productivity . . . australia and New Zealand”,

I worked for a manufacturing company in the mid 1980’s, shipping product to NZ from Australia.

Aussie manufacturing prices were high compared to UK and higher still compared to USA but were about 1/3rd the price of the local NZ manufactured product.

Reason domestic population (at that time)

USA 250 million
UK 60 million
Aus 20 million
NZ 3 million.

The productivity of NZ manufacturing was disadvantages by the economies of scale it was set up to service.

The one machine we used to make an aussie product was dependent upon doing regular tooling changes, where the Americans ran 6 machines 24 hours a day for the same product.

NZ could not cost justify buying new equipment to begin with and used older, second hand machines, 20 years out of date, which had been written off elsewhere (and a lot of that happened in Aus too).

“- the meter reading . . . . then there is an electricity meter reading exchange
- this complexity is more efficient?”

Innovation changes many things and the benefits fund the cost of doing things differently. You can cherry pick examples all you want but the point is, ‘reading meters’ is part of the delivery process, not the product being sold.

“we import rolling stock from France ie trams and trains - the trams are longer, seat less passengers and slower because it takes longer to open and close the sliding doors at tramstops
- trains are imported and more rolling stock will arrive in 2009”

If you are talking about Victoria, the capital equipment is owned and funded by government.

It sounds like more typically stupid socialist largesse, without regard to any cost/performance standards or the tax payer, more than “privatization”

Hi Col, you miss my point about profit taxation. Companies are the only entities that "trap" profits, ie they dont immediately filter down to the ultimate owner. Other business vehicles - sole traders, partnerships and trusts - do have immediate taxation at the individual taxpayer level. These entities are more commonly used by smaller business, thus removing company tax completely will put small business at an immediate disadvantage to large corporates, which I dont believe is a good outcome. It may just be that a re-think on entity taxation as a whole is needed, but it is an issue that needs to be addressed in any discussion on business taxation.

Well, here is my situation:

I have a small company, I worked through it for many years and except for the company expenses (including my salary), I kept most of the money invested in the company, treating it as an informal form of superannuation and expecting to draw it in old age when I have no other income.

When company-tax dropped from 36% to 30%, I lost 6% of my savings, that is money that was paid as tax which I will never see again as a personal tax credit (unless company-tax goes up again).

Now with this scare of reducing company-tax again, or even eliminating it altogether, I am trying to hastily move my savings from the company to a "proper" superannuation fund, but only that much a year is allowed. At the moment my company does not need much capital to operate, but if I succeed moving the money out of the company in time before the company-tax reduction and later come opportunities/need for the company to make new business investments, the money to do it will simply no longer be there!

Yuyutsu,

You havent lost 6% due to rate changes. When the rate was changed, the remaining franking credits were converted to the existing rate, which means that you havent lost them. I would expect that if company tax is reduced to zero and imputation done away with, there will be a phase-in period and allowance for credits accumulated in the past. Generally its bad business practice to retain profits in an operating entity, as it leaves all your accumulated savings available for payout if your business is sued for whatever reason. Superannuation is a good way to protect them. Superfund money can be used as business investment funds to a small extent if you have a self-managed fund. You still need to give consideration to an investment strategy, but you can use the funds to buy business real property (for example) and lease it to your company (at market rates). I suggest you find yourself a good accountant - they can cost a bit but they will usually pay for themselves many times over.

Country Gal, thanks for the advice!

I know that my company now have heaps of franking credits, but that's all on paper: what is the use of such credits without cash to back them up? For every $100 earned (after expenses) I paid $36 in tax, but if I take it out now as dividend, there are no $70 to take, only $64, and since I can only claim 30% franking in my personal tax-return, I can only recover 64*(10/7)=$91.42 of the original $100.

Anyway, I must admit that it was not such a bad deal after all, because personal tax-rates have dropped as well since, and superannuation was not a feasible option at the time either.

I agree that superannuation is now a great option and if I earned that money today, I wouldn't hesitate to put it straight away into superannuation (subject to super-limits), but at the time it was a nightmare - you could only deduct 3/4 of the sum, but had to invest the other 1/4 as well and pay income-tax on it from other sources; there was superannuation-surcharge; and the exit-terms were complex beyond human comprehension.

Thanks again.