Some companies will decide to invest elsewhere if Australia does not cut the corporate tax rate to keep up with international competition, the Reserve Bank warns.
Governor Philip Lowe was quizzed by both sides of politics on Friday about the merits of the Turnbull government's $50 billion plan to slash company tax rates.
He told the parliamentary economics committee in Sydney that if Australia did not keep up with international competitors who were cutting tax rates to encourage investment, it could miss out.
"The international tax competition is out there and the parliament has to decide whether to respond or not," Dr Lowe said.
"If you do respond, there are consequences, if you don't respond, there are consequences as well.
"If we don't respond there are at least some firms who will decide to invest their capital elsewhere."
The government's enterprise tax plan aims to incrementally reduce the corporate tax rate to 25 per cent by 2026/27.
Most companies pay 30 per cent at present, apart from those with a turnover of less than $2 million a year, which pay a tax rate of 28.5 per cent.
The first leg of the plan would immediately cut the tax rate to 27.5 per cent for companies with a turnover of less than $10 million.
Labor rejects the whole plan bar cutting the rate to 27.5 per cent for businesses with a $2 million turnover, arguing the budget cannot afford the total cost.
Dr Lowe said company tax cuts would have little impact on the investment decisions of domestic firms.
But it will make a difference to foreign investors deciding whether to invest in Australia versus other countries.
Lower corporate tax rates will help stimulate growth in the economy if Australia can attract more foreign investment, Dr Lowe said.
It needs to be the type of foreign investment that creates new assets and new jobs, rather than buying existing assets.
He said company tax cuts were just one factor in attracting that investment.
"We should also be thinking about how to make ourselves attractive for foreign capital to come and invest here - the tax helps but there are a lot of other things that we could do as well."
