As reported in Fairfax today, Treasurer Scott Morrison has indicated that tomorrow’s Budget would adjust the $80,000 tax threshold upwards, in a bid to counter bracket creep, while also cutting company taxes:
Company tax will be cut in Tuesday’s budget to encourage new investment, Treasurer Scott Morrison says, but there’s no indication that people earning less than $80,000 can expect any tax relief.
…the budget will offer modest tax cuts for people earning over $80,000.
For those earning less, however, indications are that they will get no tax relief in the budget…
The cut to the company tax rate would be the first reduction in 15 years. The cut is expected to be small in year one and grow in following years.
The problem with the flagged personal tax cut is that most taxpayers earn significantly less than $80,001, meaning that it would represent another giveaway to higher income earners. As explained recently by Peter Martin:
Most earners get nothing like the average wage. Right now the average full-time wage is $78,000, but the typical full-time wage is nearer $65,000. The average is pushed up by a comparative handful of high-earning megastars. In the real world three quarters of us earn less than that “average”.
Most are at no risk of crossing into the second-highest tax bracket.
In fact, according to analysis of Treasury data by The Australia Institute, if the Coalition went ahead with its proposal, it would benefit the wealthy up to 10 times more than average wage earners, and women would benefit the least:
For someone for whom a recent inflation-adjusted pay rise has taken them to $82,000, the benefit of a new $100,001 threshold for the 37 cent rate is extremely small – less than the price of a cup of coffee per week at $1.70 or $90 annually. For someone earning above $100,001, the benefit will be tenfold at $17 a week or $900 a year…
Those earning above $100K would get an annual tax cut of 10 times the benefit of someone who, for example, had just tipped over into the second highest bracket with an income of, say, $82,000.
And because women take up more lower-paid jobs in the labour force, including more part-time positions, the benefit to them, in many cases, will be nothing at all.
The progressive think tank’s modelling shows the cost to the budget would be in the order of $1.7 billion annually, of which women will get about a quarter of the benefit, or 27 per cent – compared to men with 73 per cent.
So we have ourselves another Abbott-lite policy aimed squarely at upper income earners that would significantly erode equity at the same time as wrecking the Budget.
The Coalition’s plan to provide company tax relief is just as spurious as it would provide the lion’s share of benefits to international investors, whilst doing little for local business owners/investors. This is because the benefit of any company tax cut to domestic owners/investors would be offset by a reduction in imputation credits. By contrast, overseas investors who do not receive imputation credits would benefit fully from any company tax cut.
To quote former Prime Minister Paul Keating:
“Australia’s dividend imputation system works such that the company tax is, in effect, a withholding tax – a tax temporarily held by the Commonwealth which is returned to shareholders when their dividends are paid. So, whether the company tax is withheld by the Commonwealth at a rate of 30% or 25% is immaterial – the Commonwealth is going to return the money to shareholders anyway, regardless of the rate. But the shareholders who will receive a benefit are foreign shareholders”.
Hence, a company tax cut would primarily benefit foreigners, and by extension larger corporations at the expense of small businesses.This is because around 98% of small businesses (i.e. those employing four or less people) are wholly Australian owned and, presumably, indifferent to slashing the company tax rate. By contrast, 30% of large companies (i.e. those employing more than 200 people) are at least partly owned by foreigners, who would be the primary beneficiaries from the Coalition’s policy.
Janine Dixon from the Centre of Policy Studies at Victoria University also released modelling recently showing that cutting company taxes would actually reduce national income – the best measure of living standards:
The Australia Institute (TAI) also recently released analysis arguing that “international and Australian data on tax rates and macroeconomic indicators provides no support to corporate Australia’s ‘instinctive’ claims that lower company tax rates bring wider economic benefits”.
In particular, the TAI found that data from Australia and OECD countries shows that:
- There is no correlation between corporate tax rates and economic growth in OECD countries.
- Countries with lower company tax rates have lower standards of living, measured as purchasing power of GDP per capita.
In addition, Australia’s historical data shows:
- Wages and mixed income has declined as a share of GDP as corporate taxes have been lowered.
- Average unemployment rates have risen as company tax rates have lowered.
- Growth in foreign investment as a share of GDP was strongest when Australia’s company taxes were highest.
Moreover, according to the TAI’s recent “Follow the Money” Podcast, the top 15 companies in Australia would receive one-third of the benefits of a company tax cut, with the CBA alone benefiting to the tune of $600 million per annum from a 5% cut to the company tax rate (from 30% to 25%).
Based on the above, it appears that the flagged tax cuts in tomorrow’s Budget are retrograde and would worsen inequities.