The Turnbull Government continues to spruik its planned $48.2 billion cut to the company tax rate to 25% over a decade, running the line that it will boost business investment, Australian jobs, and growth.
On Monday, Treasurer Scott Morrison claimed that the Government would fight for “every inch of growth” and argued that weak business profits, as revealed in the latest National Accounts, supports the case for a company tax cut:
“That is why you need to focus on doing everything we can to support earnings and to support investment to boost earnings, and that’s why the tax plan is integral to that objective”.
…”the commonsense view is that if you want business to invest, if you want businesses to have the headroom to employ more people, then allowing them to keep more of what they earn is a commonsense thing to do… Now the ultimate size of the economic dividend from this, history will prove.”
In other words, classic ‘trickle-down’ economics and a touch of the ‘vibe’.
Not to be outdone, Prime Minister Malcolm Turnbull also talked-up the company tax cut yesterday, again claiming that it would automatically lead to more investment:
“…the important point is that if you deliver a better return on investment then you get more investment”…
“I think sometimes the Labor party imagine that Australia is in some kind of bubble. Sealed off from reality, sealed off from the rest of the world … where you can deny companies tax cuts and investment won’t be affected.”
Of course, the Coalition is on the defensive on this issue after a conga-line of economists and commentators questioned the merits of a company tax cut, and whether the benefits would outweigh the costs. Included in this group are The Grattan Institute, The Australia Institute, Fairfax commentators Peter Martin, Michael Pascoe, and Ross Gittins, Victoria University senior research fellow, Janine Dixon, and of course yours truly.
The central argument of us naysayers is that the lion’s share of benefits from any company tax cut would flow offshore, thus potentially lowering national income.
Yesterday, this view received further support in a research note from Goldman Sachs’ Tim Toohey, who while lowering the cost of a company tax cut to $23 billion over 10 years, due to Australia’s dividend imputation system, also argued that around 60% of the benefits of any tax cut would flow offshore:
We show that if companies choose to distribute all of the tax cut, this results in a rise in profits to investors (i.e. an unchanged dividend payout ratio) – specifically, that 60% of the benefit of the company tax cut accrues to the offshore investor, 10% accrues to domestic investors, and 30% accrues to all participants in the economy via second round economic impacts…
Survey evidence suggests companies as less likely to choose the route of lowering the payout ratio…
The key conclusions are:
- The Treasury’s estimate of a $48bn cost to government revenue over 10 years. from a change in company tax rates appears to be calculated before including the impact of dividend imputation. We estimate that once the impact of dividend imputation is included in the calculation the net cost to the government over the same period is $23bn (53% below the Treasury estimate).
- The benefit of the tax cut for investors is $13bn with $11bn of that benefit. flowing to foreign investors and $2bn flowing to domestic investors.
- Australian based companies receive a $10bn boost to retained earnings, assuming an unchanged dividend payout ratio.
- The total benefit of the proposed reduction in company tax rates for domestic investors and domestic companies is $11.7bn, slightly higher than the benefit to offshore investors.
Is it a good deal for taxpayers to forego $23bn in company tax receipts to generate $12bn in domestic benefits? Obviously there are economic multipliers that are attached to the boost in private sector receipts from the tax cut which, in turn, promote economic growth and future tax receipts may be higher (which we address below). However, there are also positive economic multipliers that accrue to properly directed government spending/investment or to reducing public sector debt. The loss of these economic benefits would need to be included in any assessment of the net benefit of the tax cut for the private sector and we do not attempt to do that analysis in this report.
The key swing factor in the assessment ultimately comes down to how the corporate sector dividend policy responds to the tax cut and whether the foreign investor chooses to reinvest this dividend windfall back into the Australian economy.
In the wake of the Goldman report, former Liberal leader, John Hewson, also stepped-up to question the company tax cut:
“There is obviously a debate always about when you cut taxes where the benefits go,” Hewson said. “There is a suggestion of course that a company tax cut goes predominantly to multinational corporations who may not contribute anything more to Australia. They may not employ more Australians, they may not invest.
“The world hasn’t seen a significant pick-up in investment despite the fact that we have had near zero interest rates in most developed countries. So is it tax that is going to make a difference to that? I’m not sure, I think it’s a bigger issue.
“It does go to foreign shareholders. But the assumption is that those companies operating in Australia will expand their investment and they will employ people. That needs much more debate and evidence,” he said…
Meanwhile, the Council of Small Business of Australia has warned only a small minority of family businesses would reinvest the tax cut.
Hardly sounds like a ripper policy, does it, especially when the forgone tax revenue could be spent in other ways that offer far more benefits to the domestic economy and productivity.
