Cutting the business tax rate to 25 per cent would help lift Australia out of its investment doldrums, but it is no silver bullet.
That's the view of new research by the Grattan Institute think tank, saying increasing investment will require making "sacrifices today for benefits tomorrow".
Australia has suffered its biggest ever five-year fall in mining investment as the boom unwinds, while since 2009 non-mining business investment has dropped from 12 per cent of gross domestic product to just nine per cent, lower than any point in 50 years.
"Low investment risks economic stagnation," the institute's Jim Minifie warns, releasing the report on Sunday.
The Turnbull government's plan to incrementally reduce the company rate from 30 per cent to 25 per cent over the next decade is meeting stiff resistance in the parliament, especially as it will cost the budget nearly $50 billion.
Reserve Bank governor Philip Lowe told a parliamentary committee on Friday with other countries slashing their tax rates, Australia risks missing out on foreign investment if it doesn't follow suit.
In a speech last week, former Treasury boss Ken Henry also agreed there should be a much lower business tax rate and achieved more quickly than is presently being considered by the parliament.
Dr Minifie said reducing the company tax rate to 25 per cent would gradually increase investment in Australia by 0.2 per cent to 0.4 per cent in response but over a number of years.
While attracting foreign investment, a cut would reduce national income for years and would be a hit to the budget.
Income or other taxes would need to increased, or spending reduced, to compensate for the reduction in federal revenue.
"Committing to a tax cut before the budget is on a clear path to recovery risks reducing future living standards," Dr Minifie says.
Among other options, Dr Minifie says setting a lower tax rate for small companies than big companies - which political negotiations on the 10-year plan appear to be heading at this stage - is "difficult to justify" in terms of investment.
Accelerated depreciation schemes would probably increase investment, but also have substantial budget costs.
An investment allowance would encourage investment at a lower cost, but be administratively costly.
But he also believes there is room to make doing business in Australia easier by streamlining regulation.
"Lower growth may well be the 'new normal', and investment is likely to remain below previous peaks," he says.
"But that is no reason for policy complacency."
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