Who: “The Coalition’s cut to the company tax rate will cost $5 billion over the forward estimates. This reflects the direct costs to revenue from the tax reduction.” Opposition Leader, Tony Abbott and Shadow Treasurer, Joe Hockey.

The claim: The plan is to cut the corporate income tax from 30 to 28.5 per cent beginning on 1 July 2015 at a claimed cost of $5 billion over the forward estimates.

The facts: The ‘direct costs to revenue’ are different to the net costs of the Coalition policy. This is because of the links between Australia’s personal and business income tax systems. That is, when companies give dividends to shareholders, the shareholders are given credits for the company tax that has already been paid. This is to prevent tax being paid twice on the same profits. These credits (called franking credits) are deducted from the income tax to be paid by the shareholder.

The net costs to revenue of the proposed company tax cut will therefore be lower than the direct costs. This is because a lower business tax rate means fewer franking credits for shareholders, resulting in shareholders paying more income tax.

Based on figures from the Australian Taxation Office approximately 46 per cent of any change in company tax revenue would be covered by changed personal income tax collections.

The finding: The true cost to a Coalition budget over the forward estimates would be $2.7 billion. This means the Coalition has substantially overestimated the cost of its tax cut measure.

Discussion of evidence: Any estimate that ignores the indirect impact of franking credits would be overestimating the revenue impact of a change in company taxation. By including only the direct effects of the cuts to company taxation, the estimate almost doubles the net value of the change in revenue.  To see an example of how franking credits work click here.