Does the Headline Tax Concession Rate Mean Anything? Implications of a 25% Tax Rate?

Momemtum is apparently building for the Australian corporate tax rate to be cut to 25%, potentially as part of a package of incentives to invest in climate change. As the Henry Review of Business Taxation starts taking submissions from corporates, The Australian reports that tax relief and incentives associated with investments in clean technology and emission reduction targets will be high on the agenda.

It is worth pointing out that this would have a serious negative effect on the R&D tax concession unless the basis of calculating the incentive is changed.

As I have argued for some time, the government first needs to decide the dollar level of support for R&D under the R&D tax concession, and then determine the rate of deduction attaching to that return. For example, the current headline 125% tax concession translates to a 7.5 cent net benefit to companies (ie 25% of the 30% tax rate = 7.5 cents). If the tax rate were reduced to 25% the rate of support would drop to 25% of 25% or 6.25 cents per dollar invested.  To me, this is all backwards.

The government should announce a dollar level of support for R&D and then set the headline rate after that. For example, if it wants to shift the cost of capital, the support rate would be closer to 14 cents, or a headline R&D tax rate at 30% of 146% or 156% in a 25% tax regime. This is the way of thinking about R&D tax concessions that lets you alter behaviour and have relevance in the ponderings of capital allocations within major firms.

Without this change, the R&D tax concession languishes as a mere (though important) environmental setting and simply does not achieve what is possible.