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Australia faces tax challenge from Trump reform plans

Australia's government is considering changes to its corporation tax rate in a bid to compete with the US if Donald Trump can push through his plans to slash the rate paid in the US from 35 per cent to 20 per cent.

President Trump's plans - predictably backed by big business in the UK - could create the risk that countries with significantly higher corporation tax rates will suffer due to a lack of tax competitiveness. This concern has persuaded the Australian government to look at reducing company taxation.

Treasurer Scott Morrison has already written to chief executives of Australian companies urging them to support the coalition's plans to reduce corporate taxation, but the country could be dragged into a competition with an increasingly protectionist US administration over low tax rates. 

Mr Morrison acknowledged that the US move has "laid down a challenge" to Australia, which currently has a 30 per cent rate for larger firms. He warned the country must not be "stranded for investment internationally when it comes to competitiveness on tax".

However, the UK-based Guardian reported, The Australia Institute’s executive director, Ben Oquist, is firmly against such a move, which could see around $65 billion cut from the Australian government's revenues. 

He said: “Australia is likely to have nothing to fear from the cuts in headline tax rates, but other elements of the Trump plan could have negative effects. 

"Many respected economists in the world are lining up to argue that the Trump plan will not work to increase either jobs or economic growth in the US."

The issue of tax competitiveness versus potential falls in revenue from lower rates is a debate that is being parallelled in many countries across the western world. For example, the UK has cut corporation tax in recent years in order to attract more foreign investment.

However, with the IMF and Oxfam warning against a "race to the bottom", there may be only so far Mr Morrison will be able, or even willing, to go in cutting business taxes.

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