The corporate tax cut scam

Prime Minister Turnbull and Treasurer Morrison are currently refusing to admit the cost to revenue of the Coalition’s ten-year corporate tax cut plan which will reduce company tax for all corporations to 25% by 2025-26. Chris Richardson of Access Economics estimates that the cost will be something like $55 billion over the 10 years and $16.5 billion every year thereafter. That is a massive cost in anyone’s language, especially when Australia faces a stubborn structural deficit that shows no sign of disappearing any time fast.

This sort of measure might conceivably be justified if it was going to create a large stimulus for “jobs and growth”. However apparently Treasury estimates that the benefit will be minuscule:

It’s standard rhetoric from business groups and the government that reducing company taxes will give companies spare cash that will “trickle down” through greater employment and increased wages and this will increase economic growth. Unfortunately, the actual evidence backing this up is slim. Even Treasury’s modelling used to support the measures puts the impact at an extra 1% increase in GDP over 10 years. That figure is so small that it might as well be zero.

Malcolm Turnbull’s instant resort to the Tory kneejerk “class warfare” label isn’t likely to cut much ice with uncommitted voters in the face of such a massive tax cut with so little rational economic purpose, perpetrated in the face of a stubborn structural deficit after the Coalition spent years banging on about Labor’s “debt and deficit disaster”.

I must admit that I advocated fairly recently that a company tax cut might be a good idea. As a non-economist I was relying on comments to that effect in the Henry Report, old observations by Nicholas Gruen and my own half-baked understanding of the so-called Irish “Celtic Tiger” economy. From memory, Ken Henry’s suggestion was fairly tentative and appears to be negated by the current Treasury modelling.

As for Nicholas Gruen’s observation, he recently reminded us that he had in mind a very large corporate tax cut to a rate of something like 17%, which could only be afforded by abolishing dividend imputation.  That sort of change would overwhelmingly benefit foreign corporations which currently gain no benefit from dividend imputation (unlike local companies whose individual shareholders get to deduct the imputation credit from their personal income tax). Given recent revelations about the number of overseas corporations that arrange their affairs so as to pay almost no Australian company tax by implementing artificial arrangements to shift their Australian profits to related corporations set up in tax haven countries, a reform of the sort Nicholas has in mind would be political suicide for any party that proposed it.

Moreover, plausible analysis (at least to my eyes) suggests that the contribution of low corporate taxes to the Irish “Celtic Tiger” economy may have been greatly exaggerated. In any event, the Irish economic miracle vanished in the wake of the Global Financial Crisis, along with the hot money that created it. Similar arguments are made about the relative ineffectiveness of large corporate tax cuts in Canada, a country with an economy much more similar to that of Australia than Ireland:

Together, these successive cuts reduced combined Canadian corporate taxes (including provincial rates, which also fell in several provinces) from near 50 per cent of pre-tax income in the early 1980s, to 26 per cent today. In theory, the resulting boost to profits should have stimulated a strong response in business investment. Unfortunately, hopes for this “jobs and growth” dividend have been repeatedly dashed.

Instead of growing, business spending on fixed capital (machinery, structures, etc.) declined under lower company taxes, by about one full point of GDP since the reforms began. Business innovation spending (one of Mr. Turnbull’s top priorities) fared even worse: business R&D outlays shrank by over one-third as a share of GDP, to a record low of just 0.8 per cent. In fact, over the last decade real business investment performed worse than during any other era in Canada’s postwar history. Several provincial governments have given up waiting for the promised investment boom, and are now increasing company tax rates to help address chronic deficits.

In the circumstances, it’s difficult to  see Turnbull and Morrison’s ten-year corporate tax cut plan as anything other than a grossly irresponsible ideologically driven free gift to the Coalition’s corporate mates, at a time when Australia can ill afford it.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
This entry was posted in Politics - national. Bookmark the permalink.
Subscribe
Notify of
guest
2 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Anthony Park
Anthony Park
5 years ago

Very much enjoyed this post. A couple of thoughts:

While I appreciate you can change your mind in response to new evidence… blogs like this create the ideological space for ideas like a company tax cut. Advocating one policy then condeming the policy once it is announced makes life hard for policymakers. A conservative politician might have felt some degree of consensus was in place and hoped to reap some political capital from a policy supported by their own base and the centre left. Instead they would probably feel like they had been ambushed.

The other thought is that I imagine as a shareholder I would like a bigger dividend if company tax was cut. More employees would not necessarily be high on my list. Management might also want to pay down debt, lower product prices etc. In terms of mote employees, there probably isnt a need unless the business is expanding. Given it can cost tens of thousands to hire and train a new employee, plus all that paperwork. It might not be worth it.

As much as I hated casual work, particularly the utter disposability I was subjected to. I cant deny the ease with which ‘independent contractors’ working for Uber, Jamberry, online tutoring etc can get work. If a similar app was present for my organisation I would love to employ a affiliated students, casuals or ex staff for a few hours per week. Currently, I would be lucky if a casual contract got processed within four months.

Nicholas Gruen
Admin
Nicholas Gruen(@nicholas-gruen)
5 years ago

Given recent revelations about the number of overseas corporations that arrange their affairs so as to pay almost no Australian company tax by implementing artificial arrangements to shift their Australian profits to related corporations set up in tax haven countries, a reform of the sort Nicholas has in mind would be political suicide for any party that proposed it.

Thanks Ken, you can be more objective about this than me obviously because it’s my idea. But having proposed it, the one bit of pushback I got that I agreed with when I first proposed abolishing dividend imputation and recycling the revenue as company tax cuts, I agreed with came from Treasury who argued that a high company tax rate was at least a rent tax. They accordingly wanted to reduce company tax with the introduction of a resource rent tax. I think they were also pretty sympathetic on the dividend imputation point – something that comes through in the Henry Report if you read between the lines that Wayne had insisted upon (which if you recall was that the review should be comprehensive and no options should be off the table, except those that Wayne progressively took off the table, with dividend imputation coming after GST as I recall, but I’m probably being unfair.)

Anyway, as you’ll recall business could have had their 25% company tax if they hadn’t gone for lowest common denominator politics and backed the miners. Then we’d presumably have a much bigger hole in our budget – given how little revenue the RRT would have raised even in its dodgy pre-monstered form (as opposed to its even more dodgy post monstered form)!

Anyway, to return to your claim about the politics, I would have thought that you could counter the political problems by imposing a pretty stiff turnover style ‘Buffett tax’ on internet companies like Apple and Google – though I hasten to add I haven’t checked out the details. It may be a difficult thing to do.

Finally one argument I always thought was interesting was Treasury’s hunch that an ACE taxation system would be good for Australia. ACE or Allowance for Corporate Equity allows firms to deduct not just the cost of debt (interest) before being taxed but also equity. What’s good about that? It’s the perfect ‘rent’ tax because it doesn’t matter if it’s resource rent or oligopolistic rent, if you get it and you haven’t invested money to get it, it’s rent and you pay tax on it.

On that reading ACE taxation would be very good for Australia’s oligopolised economy systematically increasing tax on the oligopolies but giving a break to Australia’s ‘working families firms’.

On the downside, the ‘optics’ are not so good. There’s a lot of equity and so a lot of allowance that must be made for it. The Treasury person I spoke to all those years ago said a revenue neutral tax rate might be as much as 50% in an ACE system. So that looks bad for the headlines. I don’t know what the numbers would do, but my guess is that if you abolished dividend imputation, you could fund a full ACE system at 30% and perhaps have something left over to fund other stuff or further company tax cuts.

But there’s another, more substantive downside. Rents also come innovation. So businesses that had been innovative and managed to prosper from it would also be taxed more highly than businesses that just invested more. I’m not sure it’s a deal-breaker – but it’s certainly something to think about.