Patriotic Sydney siders who want to know how a simple bit of tax policy can put a bit of rocket fuel in our economy should pop along to the Reserve Bank at 12.45 for an explanation at an Economics Society of NSW function.
I'll be doing a presentation
Are you still feeling lucky punk? Why Ken Henrys hunch is right we should abolish dividend imputation and cut company tax to 19%
The talk argues for the abolition of dividend imputation and the recirculating of the revenue currently foregone by dividend imputation as a cut in the company tax rate. It could be as low as 19% even without factoring in the stimulus this would give the economy.
This is just ridiculous.
Here's what you said last November.:
Where's Ireland now? In the toilet, that's where.
You'd be aware of the terms "bubble" and "race to the bottom". It's not a sustainable strategy, and more importantly, it's not one that sensible people entertain after the bubble has burst.
You want to unleash the full power of an Asia-Pacific safe haven and at the same time address some obvious breakdown in the current system? Let's deal with those major flaws. Housing affordability with interest deductibility, negative gearing and capital gains tax deferrment. Leverage and debt generally due to interest deductibility. Foreign resource takeovers and transfer pricing and offshoring economic rent. CO2 cap and trade and the threat of even more derivatives beyond our jurisdictional control. Quick response to AGW and the current frictional deterrents to fleet of foot capital movement via stamp duty, accrued capital gain and the like. Income tax avoidance, evasion, cash economy and the disincentive effects of income tax scales. Payroll tax disincentive to employment. They'd be the main ones and they could all be wiped away if replaced by resource and carbon taxing(reserving the opportunity to pull an ETS out of the drawer later as circumstances required) You were saying about that fiddling around the margins with company tax?
Of course if AGW really was the greatest threat to mankind since Bush or Howard we could drop resource taxing(including the logical extension of land use as a resource) for total reliance on CO2 equivalent taxing and presumably achieve that 60% emissions reduction by whenever we can get around to it, all for only 1% of GDP growth by all accounts. If not there's always that cap and trade whizzbangery to overlay on it after giving total reliance on straight carbon taxing a fair run for our money.
SJ,
Ireland is in a parlous state - in the short term. So what?
Are you saying that the company tax cuts have led to Ireland's savage recession? If so please set out the argument.
If you do, I'm arguing that Ireland's tax competition has been a substantial part of driving them from near the bottom of European living standards to near the top (less a bit for the current sharper recession than others in Europe.
Further, Ireland is just one example - as Nicholas said, it's a relationship that holds up well across a large number of countries. My only concern is the degree to which there might be something of a (not-quite-)zero-sum game: how many companies invested in Ireland purely because tax rates were lower there, but would have generated just as much wealth elsewhere, if they were happy with having more of that wealth redistributed via taxation? In other words, if Australia was the only country in the world, would lowering corporate tax rates really make that much difference?
"Are you saying that the company tax cuts have led to Irelands savage recession?"
Sort of. The types of business that were attracted to Ireland during the bubble departed again once the bubble burst.
But that's not unique to Ireland. The same can be observed in India and China, amongst others. It'd be fair to say that the stronger the growth during the bubble's expansion, the bigger the hit afterward.
The danger at this stage is different. There are things that Australia could do to improve its situation, like currency devaluation, increasing tariffs, or lowering company taxes. You see where this is leading? All of these things work if Australia does them, but the other countries don't.
I'd also endorse NPOV's "zero sum" argument above.
OK, so let me get this straight. We see an opportunity to take advantage - like the Irish and the Singaporese and Hong Kong and various other places, but we don't take it because it's 'zero sum' competition? I'm afraid I don't agree with that. We should compete however we can, at least where others are doing likewise, and if you like I'll back you on some multinational agreement against tax competition, but the idea that we bear the white man's burden in Asia - well it seems a bit dumb to me. Still, the New Zealanders are playing along. . . . so maybe it will work out. . . .
Not sure if you addressing me SJ, but I never said we shouldn't take it on. I think the arguments for reducing the corporate tax rate are pretty sound. However I will say I disagree with "compete however we can" - the reason competitions of any sort have rules is because without them they'd descend into a melee that very few would gain from. But anyway, didn't we have a discussion some while back about the fact that countries don't really compete economically in a meaningful sense (it involved something written by Krugman, I remember).
(Read: "Not sure if you're addressing me or SJ")
I can't tell who he's responding to, NPOV. Not sure where the "white man's burden" thing came from either.
Whether or not the reduction in company tax rates makes sense, at this particular point of time, there's a risk that it'll be seen as a "beggar thy neighbour" policy. We cut to 19%, some other country immediately cuts to 5%, we gain nothing. cf Smoot-Hawley.
"White man's burden' is a reference to the kind of argument you're proposing SJ. I'm not proposing gun running, I'm proposing tax competition. We're a small country in Asia and plenty of Asian countries are engaging in tax competition. If you're against it, support an international agreement. Don't imagine that our own actions will make much difference to what other countries do.
OK, I can see that you're being non-responsive.
Do you see a distinction between "in principle, at some time in the future" and "right now"?
Look, everyone can put "rocket fuel" in their economy right now by cutting corporate tax rates to zero. Except it's obvious that that won't work, because it relies on attracting existing activity from somewhere else. Zero sum.
And I still can't understand this "white man's burden" thing. I know what the term means, but I can't understand why you're using it. I'm not being deliberately obtuse here, I'm genuinely mystified.
SJ...I would dispute that it's obvious it won't work. It depends entirely whether corporate tax rates are more or less efficient than other taxes, and what affects they have on investment decisions in and of themselves.
NPOV, that's the steady state growth answer, and there's nothing wrong with that, in principle, at some time in the future.
Apparently, I'm having difficulty convincing people that we might not be in a steady state growth situation right now.
Don't cry too many tears over the construction industry, and some real-estate developers losing a bit of money -- they do pretty well when times are good. The other sectors of the economy drive the construction industry, rather than the other way around. In particular, technology, resources, food and fuel drive everything.
Big American companies (like Dell and google) need a stepping stone into the protectionist European Union and they are not going to choose France (too socialist) nor Germany (too expensive) nor Eastern Europe (anything might happen), so they choose Ireland. So Ireland floated themselves on the US technology boom, and it was good while it lasted but there's been a bit of a letdown recently, no surprise that Ireland has also been let down. But think about this: the investment in training, know-how and technology infrastructure that the US tech giants pushed into Ireland is all still there. Dell might close down factories but those people who assembled Dell laptops last year can rapidly adapt to Toshiba laptops next year.
Ireland was primarily an agricultural economy not long ago, they have gone from a technological backwater to a place where at least some serious engineering happens.
Plus, they now have available infrastructure and knowledge that will be even more attractive to future business and give them a chance at maybe something home grown. Any future business investing in Europe will face the same decisions that Dell and google faced and quite likely come to the same conclusions. I think we have to work off the presumption that future business will happen (once the international banking industry goes back to something moderately stable like a gold standard) because these things always work themselves out... people still want to trade.