DAVID ALEXANDER: Business sector is Budget collateral damage

Why is the Government imposing large new taxes on Australian businesses?

The Government had made clear that it wanted to target investment in established property in the Budget, but that doesn’t explain why it’s also imposing major tax increases on investment in business.

Unfortunately the business community is going to be collateral damage in an operation aimed at hitting other targets.

Somewhere through the Budget process, someone in charge should have said “Hold on, putting up taxes on business is going to be a disincentive to invest in Australian business, so whatever we’re doing we can’t do that.”

The fact is, there is no rational economic reason at all why tax reform should be thought to require higher taxes on investment in business. That is the logical error at the heart of the Budget changes.

We actually need more investment in Australian businesses, not less, if we want to secure future prosperity.

There is no other path to have ongoing first world wages than to have a thriving business sector paying those wages, and that can’t happen if they are being dragged down with higher taxes.

An extra perversity of the proposed capital gains tax changes is that the design entails punishing the highest productivity firms the most.

Think of all those businesses, small, medium and large, across any industry, whose operations are best practice.

Under the proposed system, because these businesses make the biggest capital gain they will suffer a disproportionate increase in tax.

By penalising best practice it is, by its design, a tax on productivity.

The Government recognises that its changes hurt start-ups in the tech space, but the damage of course extends to businesses of all shapes and sizes across all industries.

The Government is looking to ameliorate the damage to the business community, but ameliorating damage is not addressing the issue. Why would you damage investment in business at all?

Apart from the capital gains tax increase, the Government is also pushing an extra tax on businesses through trust changes.

Governments of both persuasions for decades have recognised the benefits of trust structures for small and medium businesses, not only for things like asset protection and business continuity, but also as a means of containing tax costs for businesses.

These governments have long understood that the alternative to containing tax costs on business is to drive those costs up, and that doing so would result in serious downsides.

Loading up small and medium-sized Australian businesses with higher taxes, for example, would act as a drag on their productivity and undercut their ability to compete and innovate.

The total extra revenue from the CGT and negative gearing change and the trusts change is expected to be over $80 billion over the next 10 years, with a large part landing on business, so it is no surprise that the reaction of the business community is strongly negative.

The broad picture of the Budget shows deeply concerning developments: spending blowouts will see government spending rising to historically high levels over coming years, with these big and rising tax increases on the private sector to be used to feed the lumbering giant.

This growing transfer of resources from the high productivity private sector to the low productivity government sector is not a recipe for economic success but for economic decline.

The only real solution is to scrap the tax increases on business and recognise that tax reform should support investment in business rather than deter it.

David Alexander is chief of policy & advocacy at the Australian Chamber of Commerce and Industry