Are you still feeling lucky punk?

http://pistonsnationblog.com/images/basic_math.jpgPatriotic 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.

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SJ
SJ
12 years ago

This is just ridiculous.

Here’s what you said last November.:

Irelands economic acceleration has been supercharged by a company tax rate of 12.5%. Its top personal rate? 42%…

But Id argue that the case for cutting company tax is, if anything, stronger than Henry lets on. Thats because another kind of “alignment” — that between low levels of company tax rates and high levels of economic growth — is one of the few really robust policy implications of cross country studies.

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.

observa
observa
12 years ago

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?

observa
observa
12 years ago

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.

NPOV
NPOV
12 years ago

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?

SJ
SJ
12 years ago

“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.

As Ireland slides deeper into a recession, its workers are returning to the emigration trail that blighted the nation for 150 years until the Celtic Tiger economic boom of the 1990s. With the Dublin-based Economic and Social Research Institute forecasting that 50,000 people will leave in search of work, the country is facing what former Prime Minister Bertie Ahern calls the dark days of mass exodus again.

The 1980s are on peoples minds, and they dont want to go back there, said Dermot OLeary, chief economist at Dublin- based Goodbody Stockbrokers. Population growth helped drive Irelands economy, so a reversal is going to hurt by reducing the economys productive capacity.

The flight — the biggest in two decades — comes as Irelands economy shrinks the most of any euro-area nation. Gross domestic product may contract by about 10 percent between 2008 and 2010, and the jobless rate may reach 15 percent by the end of next year, a 15-year high, according to Goodbody. Unemployment averaged 4.6 percent in 2007.

Unemployment Lines

Many of those joining unemployment lines and considering emigrating worked in construction, which is shrinking at a record pace after a decade-long boom. Elaine McNamara, who came home from Australia in 2006, plans to return in June with her partner, a carpenter.

My boyfriend could be laid off at any time, the 28-year- old said. The building industry is very bad.

Renewed emigration marks a sharp change of fortune for the island nation, which has a population of 4.4 million. Between 2000 and 2008, a net 400,000 people arrived, drawn by work at building sites, factories and hotels. Thats all changed as Dell Inc., Intel Corp. and Waterford Wedgwood Plc, the Kilbarry, Waterford-based maker of crystal and tableware, cut jobs.

Biggest Exporter

Once Irelands biggest exporter, Dell — based in Round Rock, Texas, and the worlds second-largest personal-computer maker — said last month it will eliminate 1,900 jobs at its factory near Limerick. Santa Clara, California-based Intel, the worlds biggest maker of computer chips, said on Feb. 17 that it is seeking 200 to 300 voluntary job cuts at its plant in Leixlip, west of Dublin, where about 5,000 people work.

Davy, Irelands largest securities firm, this week said it will cut 12 jobs, adding to the 70 it shed last year. Unemployment-benefit claims rose 11 percent to 326,100 in January, the highest since records began in 1967.

The biggest exodus this year will be among the 170,000 workers who arrived during the past four years from Poland and other central and eastern European countries. Locals are starting to join the retreat, threatening smaller communities that often rely on a single industry.

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.

NPOV
NPOV
12 years ago

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).

NPOV
NPOV
12 years ago

(Read: “Not sure if you’re addressing me or SJ”)

SJ
SJ
12 years ago

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.

SJ
SJ
12 years ago

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.

NPOV
NPOV
12 years ago

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.

SJ
SJ
12 years ago

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.

Tel_
Tel_
12 years ago

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.