Tax breaks have ‘little effect’ on business investment, RBA finds
There is no strong evidence that investment tax break policies have boosted business investment outside of the GFC, according to analysis by the Reserve Bank.
The Reserve Bank of Australia (RBA) has found little evidence that investment tax break policies (ITBs) implemented over the past 15 years have effectively stimulated investment outside of the global financial crisis.
“Policies implemented during the global financial crisis increased investment,” the RBA said.
“However, we find mostly no evidence of an effect for other investment policies, including those implemented to address the COVID-19 pandemic.”
The RBA hypothesised that ITBs may be the most effective in economic downturns where credit supply is impacted, such as the GFC, rather than demand-driven downturns like the pandemic.
“In Australia, ITB policies as economic stimulus may be most effective during downturns which are driven by a shock to credit supply, rather than a sharp decrease in demand,” the RBA said.
“ITBs appear to loosen cash flow constraints for businesses in periods of credit dislocation. In normal times they seem to have little effect.”
The RBA’s analysis delved into the impacts of business investment tax breaks, including tax credits and instant asset write-offs.
Unincorporated businesses appeared to be more responsive to ITBs than incorporated businesses. According to the RBA, this is likely because, in Australia’s system, shareholders can lower their tax bills to reflect taxes already paid by their company.
The Reserve Bank also found tentative evidence that corporate tax cuts for small businesses in the mid-2010s stimulated additional investment, but qualified that more research will be required to confirm this.
The RBA stressed the importance of clarifying the broader economic impacts of ITBs, to underpin smarter policy decisions and more accurate economic predictions.
“Such incentives are inherently costly in fiscal terms, and so it is important to understand whether they are actually effective in stimulating additional investment,” the RBA said.
“Understanding these policies can help us to forecast what is going to happen in the economy after they are implemented or removed, which is particularly important during downturns.”
Governments should consider different policy avenues to boost business investment, the RBA suggested following its research.
“ITBs can be effective tools for stimulating the economy during a downturn – but this is highly dependent on the nature of that downturn,” the RBA said.
“Outside of this, smaller policies targeted at ‘structurally’ raising the level of investment during normal times seem to have very limited effects and so future policies might require different features to achieve their intended benefits.”
