New figures from KPMG Economics’ global macroeconomic modelling suggests that Australia’s GDP will be permanently reduced by 0.3 per cent in the medium term as a direct consequence of the US tax reforms, equating to $5 billion and 25,000 jobs lost.
“It is important to note that these are likely to be conservative estimates,” said KPMG chief economist, Brendan Rynne.
“Depending on how aggressively global firms, in particular US companies respond, given the incentives contained in the legislated tax reforms, there is a definite risk that our modelling has underestimated the amount of capital which would otherwise have come to Australia but will now get allocated to economic opportunities elsewhere.”
However, Mr Rynne believes the biggest impact will most likely come from the reduced direct investment in to Australia from US investors, or from non-US foreign investors who may now divert their capital to the US that otherwise might have come to Australia.
“The US is the single largest foreign investor in Australia; investing about one and a half times more than investors from the UK, and nearly 10 times more than investors from China,” said Mr Rynne.
“As a small, open economy that relies on the world to supplement our own savings for investment, if global capital decides Australia is no longer as attractive as the US as an investment destination, solely because of more competitive company and international tax regimes, then the negative economic impacts modelled above are likely to be understated.
“Our analysis has shown that, in the global economy where every country is chasing a finite amount of new investment dollars, the margin matters.”
Fellow big four firm PwC has been similarly advocating for corporate tax cuts in Australia, pointing to early signs that should ring a “warning bell” for the country if it chooses not to follow suit.
“The future of Australia's economy requires decisive action that will fuel investment and growth. Without it, we risk not only the future prosperity of our current businesses, we almost guarantee that we will not be the home of tomorrow's businesses.”
However, prominent independent economist Saul Eslake earlier told Accountants Daily that he believes the merits of corporate tax cuts have been overstated and that individual tax cuts would better suit the Australian tax landscape.
“Given our dividend imputation system, the benefit of cutting the statutory tax rate in Australia will go primarily to foreign shareholders and while that may raise the rate of return on investment in Australia, there's absolutely no guarantee or any compelling reason to believe that foreign companies will necessarily increase their investment in Australia,” said Mr Eslake.
“Businesses make investment decisions for a whole host of reasons of which the tax rate is only one so I don't think arguments put forward for Australia to join this race to the bottom in terms of corporate tax rates are all that persuasive.
“It's far more likely that a given dollar amount of a personal income tax cuts would be recycled into spending into the Australian economy than the same dollar amount of corporate tax cuts.”
Jotham Lian is the editor of Accountants Daily, the leading source of breaking news, analysis and insight for Australian accounting professionals.
Before joining the team in 2017, Jotham wrote for a range of national mastheads including the Sydney Morning Herald, and Channel NewsAsia.