The Turnbull government is not embarking on a "race to the bottom" when it comes to reductions in the corporate tax rate, the finance minister says.
During sometimes firey exchanges with Labor and Green senators during a hearing on Wednesday, Mathias Cormann said company tax rates had been cut to 21 per cent in the US, 17 per cent in the UK and 12.5 per cent in Ireland.
"We are not proposing to go down to that level and chase every country down," Senator Cormann said.
"What we are proposing to do is to take Australia over a 10-year period to the OECD average ... just below 25 per cent."
Treasury secretary John Fraser told the hearing that as result of the changes in the US and other countries, Australia will have one of the highest corporate tax rates amongst advanced economies.
"In a competitive world for corporate capital flows this represents a challenge," he warned.
He said the impact of the US corporate tax cuts so far has been a "clear positive" with the likes of the International Monetary Fund raising its economic growth forecasts.
Lower corporate tax fosters better economic growth and leads to higher real wages because it encourages productivity, he said.
The government's tax plan would reduce the company tax rate to 25 per cent from 30 per cent for all businesses over the next decade, but it looks set to be blocked in the Senate.
Mr Fraser declined to comment on this potential political deadlock.
But he gave short shrift to the idea of legislating so businesses have to give their workers a pay increase in return for a tax cut.
He was asked whether he was aware of the proposal in Japan where businesses can receive a three per cent tax cut if they provide a three per cent wage rise for their staff and whether that was an idea worth pursuing in Australia.
"We don't really, as a rule, look to Japan for fiscal policy guidance," the Treasury secretary said.
Senator Cormann pounced on the question.
"If you increase the cost of employing someone without improving the profitability of business around Australia you will increase unemployment," Senator Cormann warned.
Asked whether the budget would still return to surplus by mid-2021 if the government proceeds with its planned business tax cuts, Mr Fraser said: "Absolutely".
