This week the Turnbull government is trying to convince the Senate to cut the company tax rate from 30% to 25%. A company tax cut is a bad idea, and yet it has it taken hold and apparently 44% of Australians support it.
It’s being presented as a simple answer to a host of economic challenges – stagnating wages, end of the mining boom, a decline in manufacturing, widening income inequality. Really, the government’s thinking is no more complex than this: the answer to creating jobs and growth is to cut company tax.
“Give companies more money back, and they will invest it in new jobs!” they say. “New Zealand did it!” they say. “Trump is promising to do it!” they say.
To paraphrase what my mother used to say, if New Zealand and Trump jumped off the Brooklyn Bridge, should we do it too?
It should come as no surprise that a Coalition government wants to cut the company tax rate. It has been a holy grail of public policy for their mates in the Business Council of Australia for many years. Some media outlets seem to have joined the campaign.
So why has this bad idea taken root and grown? Start with the Turnbull government’s lack of creativity, intellectual rigour and courage in policy-making. Add in a form of group think that too often sets in when it comes to public debate in Australia. And for good measure throw in a pinch of vested interest.
Consider who is pushing for a company tax cut, and who benefits: it’s the managerial class, clustered in associations like the BCA. Think of the CEOs and other C-suite managers who have remuneration packages where performance pay is linked to company profit: a company tax cut makes a company’s earned income look better, and makes it easier for managers to reach their bonus targets.
Well, at least some “workers” would be getting jobs and growth from a company tax cut.
A company tax cut will cost the budget almost $50bn over the next decade. As the Turnbull government tries to push it through this week, here are 10 reasons the Senate should vote down this bad idea:
1. A company tax cut will create barely any impact on jobs and growth. As the Australia Institute points out, Treasury’s modelling shows that these tax cuts will cause some small increase in employment (0.1% in 20 years), wages growth (up less than 0.1% per annum) and GDP growth (0.05% per annum).
That’s not much return for $50bn. Given the shape of the budget ($36bn deficit, $95bn debt), the government shouldn’t be giving up so much tax revenue to get back so little in terms of jobs and growth.
2. A company tax cut is based on a flawed theory: trickle-down economics. The International Money Fund says trickle-down is discredited. When I interviewed the Chair of the Business Council of Australia, Grant King, on Sky News I asked him to name one country where trickle-down economics had produced jobs and growth. He failed to come up with a single example.
3. A company tax cut will do little to encourage more domestic investment in Australia. Australian companies already invest most of their funds here, even with a 30% tax rate. As David Hetherington points out, in 2015 Australian firms invested $109bn in private capital expenditure locally, compared with $22bn overseas.
4. A company tax cut will do little to encourage more foreign investment in Australia. Foreign companies already invest here, even with a 30% tax rate. Again, to cite Hetherington, Australia is a net importer of capital. While Australian companies invested $22bn overseas in 2015, we got that and more back from foreign companies: they invested $30bn in Australia.
5. A company tax cut will not give extra money back to Australian companies or shareholders. That’s because Australia uses a tax treatment known as “dividend imputation”. This means the dividend isn’t taxed twice (once when the company is taxed on its profit, and again when the profit is distributed to Australian shareholders). As Ross Gittins points out, only foreign shareholders are double taxed, and really, only foreign shareholders pay company tax: therefore, foreign shareholders get the benefit from a cut in the company tax rate.
6. A company tax cut will not actually reduce the rate from 30% to 25%. Most companies in Australia already pay less than a 25% tax rate. As Wayne Swan points out, thanks to deductions, deferred losses, minimisation and evasion, public companies in Australia pay an average of 24% on their taxable income, while private companies pay an average of just 19%. Swan asks: “If jobs and growth aren’t materialising at Australia’s effective company tax rates of 24% and 19%, how will a cut in the headline rate make a difference? And will those companies who currently pay no tax, at any rate, suddenly be inspired to hire?” Good questions.
And don’t argue that Swan once pushed for a company tax cuts. First of all, he proposed a smaller cut. Secondly, Swan’s cut would have been paid for by the mining tax. Thirdly, Swan freely acknowledges he proposed cutting company taxes at a time before the scale of multinational tax avoidance was well understood. Company tax cuts are, he says, yesterday’s solutions to today’s problems.
7. A company tax cut will be paid for, in part, by individual taxpayers. As the Australia Institute points out, the government is likely to cover the loss of tax revenue from companies by recovering it from wage earners as they move into higher tax brackets through bracket creep.
8. A company tax cut will, in theory, be paid for by a “morality dividend”. Believe it or not, the government seems to be banking on companies voluntarily choosing to stop profit-shifting and avoiding tax in gratitude for a cut in the company tax rate. Truly. (I’m not making this up.)
9. A company tax cut will, most likely, be paid for by a cut to government services. Once fully implemented a company tax cut will cost the budget some $8bn each year. Bracket creep and a morality dividend won’t be enough to cover the cost: look out for cuts to the big portfolio areas, like health, education or social services.
10. A company tax rate of 30% hasn’t hurt the Australian economy to date. As economist Stephen Koukoulas points out, Australia has gone 25 years without a recession and the company tax rate has been 30% or higher every single day. #justsaying
The Senate should avoid this simplistic answer, and simply say no.