1 Globalisation and the dilemmas of income taxation in Australia Steffen Ganghof* & Richard Eccleston** * Max Planck Institute for the Study of Societies, ** Griffith University October 2003 Abstract: One of the most striking trends in corporate taxation over the past two decades has been the sustained fall in corporate tax rates. Most of the recent literature argues that the main cause of this trend is changing policy beliefs and objectives held by domestic elites, and that the consequences are minor because tax rate cuts have been compensated by a broadening of the corporate tax base. Focusing on Australian income tax reform in the 1980s and 1990s, the article both complements and challenges the literature by establishing three empirical facts. First, corporate tax competition was the crucial driving force behind corporate tax cuts. Second, and related, Australian policymakers continued to embrace investment incentives such as generous depreciation allowances as pragmatic ways to increase the level of investment, at a particular level of taxation. However, with increasing competitive pressure on the corporate tax rate, policymakers had to trade off fewer investment incentives against a more competitive corporate tax regime. Finally, competitive corporate tax cuts put pressure on income taxation as a whole, because low corporate rates provide opportunities for high-income taxpayers to avoid taxes which the high-rate corporate tax regime had successfully prevented. Indirectly, therefore, corporate tax competition led to far-reaching rate cuts in personal income taxation. The article analyses how governments in Australia dealt with the tradeoffs created by corporate tax competition and discusses the likely consequences of continuous tax competition. Acknowledg ment: We thank Miro Bogner for able research assistance.