To paraphrase my mother, if New Zealand and Trump leaped from the Brooklyn Bridge, should we follow suit?
‘It should come as no surprise that a Coalition administration would like to reduce the corporate tax rate. For many years, it has been a holy grail of public policy for their Business Council of Australia colleagues.’ Photographer: Mike Bowers, Guardian
The Turnbull government is attempting to persuade the Senate this week to reduce the corporation tax rate from 30% to 25%. A corporation tax cut is a horrible idea, yet it has taken hold, with 44% of Australians allegedly supporting it.
It’s being marketed as a straightforward solution to a slew of economic problems, including stagnant wages, the end of the mining boom, a drop in manufacturing, and rising income inequality. The government’s view is really no more complicated than this: the solution to producing employment and growth is to lower corporate taxes.
“Give businesses more money, and they will invest it in new employment!” they argue. They exclaim, “New Zealand did it!” “Trump has promised to do it!” they exclaim.
To paraphrase my mother, if New Zealand and Trump leaped from the Brooklyn Bridge, should we follow suit?
It should come as no surprise that a Coalition administration intends to lower the rate of corporate taxation. For many years, it has been a holy grail of public policy for their Business Council of Australia colleagues. Some media outlets appear to be supporting the effort.
So, what is the origin of this poor idea? Begin with the Turnbull government’s lack of policy inventiveness, intellectual rigour, and boldness. Add to that a type of groupthink that all too frequently occurs in Australian public discussion. Throw in a spoonful of vested interest for good measure.
Consider who is advocating for a corporate tax cut and who stands to benefit: the managerial class, as represented by organisations such as the BCA. Consider CEOs and other C-suite executives who have remuneration packages in which performance pay is related to business profit: a corporation tax decrease improves a company’s earned revenue and makes it simpler for managers to meet bonus objectives.
A corporation tax decrease would, at the very least, provide jobs and growth for some “workers.”
A reduction in corporate taxes will cost the government over $50 billion over the next decade. Here are ten reasons why the Senate should reject this awful notion as the Turnbull administration tries to force it through this week:
1. A reduction in corporate taxes will have little effect on job creation and growth. According to the Australia Institute, Treasury modelling indicates that these tax cuts will result in a tiny rise in employment (0.1% over 20 years), wage growth (less than 0.1% per year), and GDP growth (0.05% per year).
That’s not a bad return on $50 billion. Given the state of the budget ($36 billion deficit, $95 billion debt), the government should not be foregoing so much tax money in exchange for so little in terms of employment and growth.
2. A tax cut for corporations is predicated on a false theory: trickle-down economics. According to the International Monetary Fund, trickle-down economics is debunked. When I interviewed Grant King, the Chair of the Business Council of Australia, on Sky News, I challenged him to name one place where trickle-down economics had resulted in job creation and development. He couldn’t think of a single example.
3. A reduction in corporate taxation will do nothing to stimulate additional domestic investment in Australia. Even with a 30% tax rate, Australian corporations currently invest the majority of their assets here. According to David Hetherington, Australian corporations invested $109 billion in private capital expenditure in 2015, compared to $22 billion elsewhere.
4. A reduction in corporate taxes will do little to stimulate further foreign investment in Australia. Even with a 30% tax rate, foreign corporations are already investing here. To quote Hetherington once more, Australia is a net capital importer. While Australian firms invested $22 billion internationally in 2015, we received $30 billion in return from foreign firms.
5. A corporation tax decrease will not provide more funds to Australian businesses or shareholders. This is because Australia employs a tax strategy known as “dividend imputation.” As a result, the dividend is not 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 only foreign shareholders pay company tax, therefore a reduction in the business tax rate benefits foreign shareholders.
6. A reduction in corporate taxes will not drop the rate from 30% to 25%. Most Australian businesses currently pay less than a 25% tax rate. According to Wayne Swan, because to deductions, postponed losses, minimisation, and evasion, public corporations in Australia pay an average of 24% on their taxable revenue, whereas private companies pay only 19%. “If employment and growth aren’t happening at Australia’s effective business tax rates of 24% and 19%, how can lowering the headline rate make a difference?” Swan argues. And, in any case, would firms who presently pay no tax be suddenly encouraged to hire?” Excellent inquiries.
Don’t even bring up the fact that Swan formerly advocated for corporate tax cuts. First and foremost, he advocated a modest cut. Second, Swan’s pay decrease would have been covered by the mining tax. Third, Swan fully admits that he recommended decreasing corporate rates at a time when the scope of multinational tax dodging was not generally appreciated. He claims that corporate tax cuts are yesterday’s remedies to today’s challenges.
7. Individual taxpayers will contribute to a corporate tax decrease. According to the Australia Institute, the government is expected to compensate for the loss of tax income from corporations by recovering it from wage workers when they move into higher tax rates due to bracket creep.
8. In principle, a corporate tax decrease will be compensated for by a “morality dividend.” In exchange for a lower corporate tax rate, the government appears to be betting on corporations voluntarily opting to halt profit-shifting and dodging tax. Truly. (This is not a made-up story.)
9. A reduction in corporate taxes will almost certainly be offset by a reduction in government services. A corporation tax cut will cost the government $8 billion per year once fully implemented. Bracket creep and a morality dividend will not be enough to pay the costs: expect cuts to major portfolio areas such as health, education, and social services.
10. To yet, a 30% corporate tax rate has not harmed the Australian economy. According to economist Stephen Koukoulas, Australia has been without a recession for 25 years, while the corporation tax rate has been 30% or above every single day. #justsaying
The Senate should avoid this oversimplified response and just say no.
