The Weekend Australian once again turned lobbyist for big business, publishing several articles (here and here) demanding that Australia’s federal politicians follow through with the Coalition’s policy to cut the company tax rate to 25% from 30%. Below is a sample of the drivel written:
Australia’s largest employers are warning of a potential jobs crisis stemming from Australia’s 30 per cent company tax rate, saying it was now perilously out of step with global trends and was already costing lost investment…
The chief executive of the Business Council of Australia, Jennifer Westacott, and two of the nation’s most senior business leaders have made strong arguments for the tax reductions and warned of dire consequences if these and other economic reforms do not proceed. “We are pricing ourselves into oblivion,” Ms Westacott said. The global CEO of Rio Tinto, Jean-Sebastien Jacques, said reform was not easy but is necessary. “If Australia remains stuck with a 30 per cent corporate tax rate, this will come at a cost in investment and jobs, as other nations leave Australia further and further behind,” he said. And Richard Goyder — who heads the nation’s largest employer, Wesfarmers — says we are engaged in an “economic war” competing for investment to create growth and jobs. “We can’t shrink into greatness,” he said…
The call for action by business leaders comes after Scott Morrison’s warning, reported exclusively in The Australian yesterday, that the nation would be left globally stranded if it did not reduce taxes…
Mr Shorten’s obstructionist, do-nothing approach would lead this nation to become increasingly uncompetitive in a globalised world where all nations compete for capital and opportunities.
Thankfully, more balance was found at The Guardian, with Lenore Taylor injecting some much needed sanity into the debate:
Treasury modelling did show the planned tax cuts would boost economic growth, a little bit. But there was no way to compare that increase (0.6% of gross national income in a decade’s time) with other things that might have been done with the money.
And there were no answers to questions about how we would manage the revenue shortfall, at a time when Australia is struggling to pay for things like hospitals and schools and when inequality is already rising, nor any analysis of the social and economic consequences of even more cuts to services.
There was the complicating factor of Australia’s unique dividend imputation system, which meant the real tax rate for local investors is lower than the headline rate…
Despite all their lobbying, a country’s tax rate isn’t the only factor that determines where companies invest – they also take into account things like political and economic stability.
And given the ructions of Brexit in Britain or the political convulsions in the US or the other tax ideas the new president is spraying around, like punitive import tariffs, we would have to rank pretty well on those measures.
Perhaps that relative political stability also has something to do with our comparatively strong social safety net, which the company tax take helps to pay for.
Back in November 2016, the president of the Business Council of Australia (BCA), Grant King, warned that the Government’s AAA credit rating is at risk if efforts to repair the budget fail:
Mr King told the ABC’s AM program that a ratings cut “just follows as a matter of logic”… If those budget deficits continue to expand then our credit rating will be at risk,” Mr King said…
“We are seeing indications that the deficit is deteriorating so it is going to be a challenge,” he added…
Mr King underscored the importance of Australia maintaining the AAA sovereign rating to ensure it can deliver on services Australians have come to expect during the boom years…
And yet here we have the BCA demanding a company tax cut – a move that would badly crimp tax revenues and push the Budget deficit further into the red. Hypocritical much?
For the umpteenth time, let me reiterate why cutting Australia’s company tax rate is such a bad idea.
First, there is a strong argument to be made that it would actually lower national income – which is a far better measure of living standards than GDP (see below chart).
Australia’s unique dividend imputation system means that domestic investors/owners are largely unaffected by the company tax rate, since any profits paid to them are taxed at their personal income tax rate.
Hence, lowering the company tax rate from 30% to 25% would provide local owners and shareholders with minimal benefits, since any reduction in company taxes would be offset by a commensurate reduction in imputation credits.
By contrast, foreign owners/shareholders are major beneficiaries of a company tax cut because they cannot avail themselves of imputation credits. So a cut to the company tax rate provides them with the lion’s share of the benefits, and therefore represents a transfer from Australian taxpayers to foreign owners/shareholders.
Moreover, because of Australia’s dividend imputation system, many of the international studies about the economic impacts of cutting company tax rates, as well as comparisons of company taxes across nations, are not readily applicable to Australia.
Second, the huge cost to the budget from cutting company taxes would need to be made up by either raising taxes elsewhere or cutting government expenditure on public services and/or infrastructure. Such actions would necessarily act as a drain on economic activity, as well as potentially worsening inequality, thus counter-acting any benefits from cutting company taxes.
Third, the modelling used to support the company tax cut showed minimal benefit to either GDP or employment, as explained by The Australia Institute’s Richard Denniss:
According to Treasury’s in-house modelling, and the modelling it commissioned from Chris Murphy, if the company tax rate is lowered from 30 per cent to 25 per cent then gross domestic product will double by September 2038, while without the tax cut it won’t double until December 2038. Wow, a whole three months earlier. Both modelling exercises conclude that in 20 years’ time the unemployment rate will be 5 per cent regardless of whether we spend $50 billion on company tax cuts or not…
The “benefits” are more accurately described as rounding error than significant reform.
The Grattan Institute came up with similar conclusions, while also noting that national income would likely be lowered by cutting company taxes, at least over the first decade.
Even doyen of the Liberal Party, former treasurer Peter Costello, does not believe that cutting company taxes is worthwhile. Back in October 2016, Costello claimed that the Coalition’s company tax cut policy lacked funding, balance or coherency. And earlier this month, Costello argued that cutting personal taxes would be far more beneficial than cutting company taxes.
With the Federal Budget facing immense structural pressures and a “revenue problem” – as acknowledged recently by Treasurer Scott Morrison – there is little sense in gifting tens-of-billions of dollars to foreign owners/shareholders, and in the process worsening the Budget position, lowering national income, and potentially worsening inequality.
The are far greater national priorities than cutting company taxes. Yet again, the big business lobby is talking its own book.
