Earlier this week, The Australia Institute (TAI) released research showing that the Turnbull Government’s $48.2 billion policy to cut the company tax rate from 30% to 25% over a decade could lead to billions of tax dollars flowing to the US Treasury courtesy of a tax treaty signed between the two nations.
Yesterday, Finance Minister Mathias Cormann hit back at the TAI, claiming its report is “completely false”, “fanciful” and based on “inaccurate assumptions”. From ABC Radio:
MATHIAS CORMANN: Well that is just completely false. It is an assertion made by a Greens-aligned think tank.
We all know that Greens don’t like business, they don’t like jobs, they don’t like growth.
The concern for Australia should be that Labor has jumped onto the anti-business, anti-growth, anti-jobs bandwagon of the Greens.
STEPHEN LONG: Let’s look at the actual numbers though. In that report, they said that we would be losing $11 billion in revenue over ten years.
MATHIAS CORMANN: Well, the numbers are fanciful. They’re not based on real world data. They’re based on inaccurate assumptions that have been put together by the Australia Institute.
STEPHEN LONG: So what are the real numbers in your estimate?
MATHIAS CORMANN: Well firstly, all the credible economists and economic analysts around the world will tell you that a more competitive company tax rate will boost investment, will boost growth, will boost job creation, will lead to increased real wages over time, and that is of course what the Treasury modelling shows that underpins our budget forecast.
It’s also what the International Monetary Fund, the OECD and others have said very clearly…
Following Cormann’s appearance on ABC Radio, TAI’s chief economist, Richard Denniss, penned a detailed rebuttal of Cormann’s argument and showing that the Coalition has not thought its company tax cut policy through:
While commonsense suggests that lowering the company tax rate would lead to an increase in the after-tax return on an investment, commonsense ignores the existence of Australia’s unusual system of dividend imputation. Under dividend imputation the “company” tax paid by a company is credited against the “personal” tax payable by the owner of the company. Put simply, any cut in the company tax rate simply leads to an increase in the personal income tax payable by the owner – and no change in “after tax return” on investment. Whoops.
One group of owners who might see an increase in the “after tax return” on their investment is foreign investors who cannot use Australian “imputation credits” to offset their personal tax liabilities in their home country. But while few Australians understand that the main “benefit” of a cut to the company tax rate is to foreign investors, it seems not even Turnbull government ministers understand the implications of Australia’s “bilateral tax treaties” with countries such as the US.
Just as Australian shareholders can claim a “credit” for any Australian company tax they pay against their Australian personal income tax liability, US companies can claim a credit for any company tax they pay in Australia as a credit against their US company tax liability. Put simply, a cut in the Australian company tax rate from 30 per cent to 25 per cent will mean that US companies (who face a 35 per cent tax rate back at home) will pay less tax here in Australia and pay more tax to the US Internal Revenue Service.
The existence of such a tax treaty between Australia and the US, our largest foreign investor, means that, like Australian shareholders, US companies will receive absolutely no increase in their “post tax return”. The US budget, on the other hand will, according to David Richardson from the Australia Institute, receive an $US8 billion windfall from Malcolm Turnbull’s “economic plan”. Who said Australia is not a generous country?
Neither the public’s “commonsense” nor Treasury’s modelling incorporates the existence of such tax treaties into their analysis. Indeed, the Minister for Finance seems entirely unaware of the complexities of the tax system that he oversees. When asked if it was true that the less tax US companies paid in Australia the more tax they would pay back home to the IRS, Mathias Cormann responded “[the Australia Institute] completely ignore how these things actually work in practice and the way these things will work in practice, is that more competitive company tax rate in Australia will help us bring more investment into Australia, it will help us grow the economy by more. It will help us create more jobs.”
The government’s determination to remain ‘on message’ is evident, but their understanding of the realities of our tax system is far less clear. While it’s true that “commonsense” suggests a cut in the tax rate should reduce the amount of tax paid, and it’s true that Treasury’s modelling makes such an assumption, the fact is that the real economy is more complicated than either commonsense or economic models allow.
Commonsense tells us that if the government really believed that cutting the corporate tax rate was enough to create jobs for the 730,000 currently unemployed then they wouldn’t be spending $50 billion on submarines to “create jobs” in Adelaide. Commonsense tells us that voters in Armidale, Altona and the Atherton Tablelands might think that they too need a “plan for jobs” that is based on more than trickle-down economics. But maybe they are wrong about that too.
Given that the company tax cut would primarily benefit foreign owners/shareholders, and come at the expense of spending on health, education, infrastructure and the like, each of which offer far more social and/or productivity benefits, where is the merit in cutting Australia’s company tax rate?
