Here comes the son of the super-profits tax

During the October tax forum, Treasurer Wayne Swan threw some official government support behind a proposal to tilt the Australian corporate tax system away from businesses that earn above-average profits. For bank investors, it's a policy proposal to keep a very careful eye on.

The proposal aired at the forum is for a corporate tax system called the "allowance for corporate equity", or ACE.

Under an ACE, companies would get to deduct a "normal" return on their equity, removing much of the tax system's bias in favour of debt funding. Many tax economists argue it would stimulate both local and foreign inward investment.

However, an ACE would most likely be funded by raising the rate of corporate tax on above-normal profits.

That makes the ACE effectively a form of the banks super-profit tax that the industry and its investors have always feared. It makes Australia's big four banks, with their fifteen-percent-plus returns on equity, big potential losers from an ACE. 

For a number of tax forum participants contemplating an Australian corporate landscape dominated by banks and miners, the ACE's anti-oligopoly flavour is part of its appeal.

Treasurer Wayne Swan singled out the ACE proposal as a key long-term issue for the new business tax reform working group announced at the forum.

The ACE had been raised earlier at the forum both by respected University of Melbourne economist Professor John Freebairn and by Ken Henry, principle author of last year's tax review. Henry is a particular fan of the ACE idea, and his comments tof the forum hint that he regrets not pushing it harder in his report.

Freebairn, a former Business Council of Australia research director, was quoted in the Financial Review as saying in his ACE comments: "Let's rub it into the banks; they seem to make much higher returns than anyone else".

The banking industry has occasionally worried about the prospect of a "super-profits tax" on banks, but has generally thought it an unlikely threat. The ACE proposal, however, has a policy respectability that makes it hard to ignore.

(Disclosure: David Walker was director of communications and advocacy at the Business Council of Australia in 2009 when it was advocating examination of an ACE.)