Comment on Peter L Swan’s ‘Investment, the Corporate Tax Rate, and the Pricing of Franking Credits’ (2019)

The aim of Swan (2019) is ‘to show that the way Australia’s tax imputation scheme operates already achieves the goal of a zero, or close to zero, marginal tax rate on capital’. Swan found that franking credits are close to fully priced in the ASX market; inferred that the marginal investor in Australia borrows offshore to finance purchases of Australian equity and, on the margin, pays little or no Australian corporate tax; and that foreign portfolio investors can largely avoid the tax. Therefore, reductions in the company tax rate would barely stimulate investment: there is no or no material tax wedge between the supply and demand prices for funds. The comment explores difficulties with accepting Swan’s explication of the market equilibrium. Although offering no definitive explanation of Swan’s striking quantitative results, I suggest that they are consistent with the existence of a welfare-relevant tax wedge in the funds market.