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Australia will face pressure to drop its company tax rate if US President Donald Trump gets his proposed tax overhaul passed into law, a leading market economist says.
The Trump administration has announced it planned to slash taxes on corporations from 35 per cent to 15 per cent to boost the nation's economy.
AMP chief economist Shane Oliver said if Australia is unable to compete with the US tax rate, some companies may decide to move their head office from Australia to the US.
"It will make life difficult for the Australian economy," he told ABC News.
"Companies [could] simply say we're going to relocate to the US [and] that will mean less economic activity over time in Australia and of course have an adverse impact on our economy."
But Dr Oliver warned it might not be as simple as moving offices to another country, particularly if companies look at other factors that may sway them to remain in Australia.
"Some may conclude that Australia might have more attractive corporate deductions that can reduce their overall taxable income and therefore, there may not be a benefit there in moving."
He said the Trump administration might consider financing its tax cut by reducing the number of deductions that companies can make against their overall income.
"It depends how that balances out over time, as to whether there is a real tax reduction or whether it is a function of the headline rate coming down and being offset by lesser reductions," he said, adding that he doubts that the full package would be financed by these deductions.
He also noted that this will take some time to unfold, even if the legislation is passed by the end of this year.
"Australian companies will start thinking about what they will do over the next couple of years, and if there is no clear progress — particularly for larger companies which are on current arrangements in Australia are set to retain the current 30 per cent rate — if there's no change on that front, then I think you'll start to see larger companies in Australia progressively considering what they will do," he said.
"And that will start to show up as an impact over the next five years or so, so there's a bit of time there for the Australian Government to consider its response to this."
US playing catch-up on company tax
Dr Oliver also said that the move in the US to lower tax rates may lead to a global push for tax cuts, since the superpower generally sets the direction on tax cuts and other economic initiatives.
"There were big tax cuts under Ronald Regan, and that of course led to tax cuts globally, including in Australia globally," he said.
"Once this is passed into law in the US, I think other countries will follow suit through time because once one country moves beyond the pack then it can have an impact."
However, it could be argued the US is only playing catch-up, having one of the highest corporate tax rates among developed economies.
That disparity has seen many American companies relocate their operations, or head offices, elsewhere to reduce their tax bill, often to places like Ireland where the corporate tax rate is considerably lower.
"Don't forget things have been working in the opposite direction for many years," Dr Oliver noted.
Australia could lose jobs to the US: Goyder
Outgoing Wesfarmers chief executive Richard Goyder agreed a 15 per cent tax rate in the US, if it is passed, would force the Australian Government to do something about the tax rate.
Mr Goyder has run Australia's largest conglomerate since 2005 and chaired the forum of global business leaders at G20 summit in Sydney in 2014.
"The Government's got a plan to reduce the corporate tax rate to 25 per cent — that would only just put us in the game [and] the Senate hasn't been that helpful on that," he said.
"If people don't think capital is now global, then they're kidding themselves and what the US is doing will encourage investment and job creation in the US.
"We've seen the same in the UK and I suspect we'll see more of that, and Australia is going to have to move with it."
Topics: economic-trends, regulation, accounting, world-politics, government-and-politics, donald-trump, australia, united-states