The inconvenient truth about company tax cuts

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By Leith van Onselen

Fairfax’s Michael Pascoe was on point yesterday, penning a ripping rebuke of the Turnbull Government’s proposal to cut Australia’s company tax rate from 30% to 25%:

“When profits go up, so do wages,” Business Council of Australian president Grant King declared last week as he struggled to keep alive the dream of a tax cut for his members… The reality is that higher profits aren’t translating into higher wages.

…the idea of giving foreign companies a present isn’t generating wild enthusiasm. The latest Essential poll… finds only 24 per cent of voters supporting the idea, down from 28 per cent last month.

No wonder the BCA feels the need to champion it. The large foreign-owned members of the council – many of them accomplished tax avoiders – are the only significant beneficiaries of the policy…

The reality is that there is no shortage of capital… There is so much capital sloshing around that several trillion dollars are sitting in government bonds with negative yields, guaranteed to lose money held to maturity.

…the BCA and government keep trotting out dubious Treasury economic modelling that claims more than half the corporate tax burden is borne by workers through lower wages. The modelling has been effectively debunked but a lobbyist hears what he wants to hear and disregards the rest.

The economic theory only works in times of full employment and a closed system – not when there is excess labour in a globalised economy…

Forget the model and check the real world. The scorecard for the ASX 200 companies in February reporting season showed, yet again, that most companies increased profits and increased dividend payments… What’s been the flow through to wages from those higher profits? Not much at all…

The BCA would be better served investigating what loopholes, rorts and deductions should be axed as a trade-off for lower rates… Build up some credibility in overall tax policy… and come up with a plan that makes sense to the Australian people… Until then, forget it.

Well said. Regular readers will know that MB strongly opposes the Coalition’s company tax cut plan because:

  • most of the benefits would flow offshore;
  • national income would be reduced;
  • the Budget would lose significant revenue, resulting in tax rises or expenditure cuts elsewhere, and potentially a credit rating downgrade (hence lowering jobs and growth); and
  • Treasury’s own modelling showed almost no benefits to jobs and growth.
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At an estimated cost to the Budget of $8.2 billion per year, there are many other policy options available that would more effectively boost jobs, growth and overall wellbeing of the Australian people at far lower cost.

If Malcolm Turnbull had any political acumen, he would back-track on company tax cuts pronto. The economics does not support it. And the people do not want it.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.