Turnbull lies shift to $48 billion company tax cut

By Leith van Onselen

Prime Minister Malcolm Turnbull has stepped up the sales pitch for the Government’s $48.2 billion of cuts to the company tax rate claiming that it would deliver four times the benefit for the Australian economy. From The Australian:

“It is very clear that as you reduce business taxes you will get more investment and more employment,” Mr Turnbull said.

“The Treasury estimated last year – our Treasury, the Australian Treasury – that for every dollar of company tax cut, there was four dollars of additional value created in the overall economy.”

A Treasury paper last year mapped out the four-for-one equation but did not put it in the same way as Mr Turnbull.

“The combined decrease in labour and capital incomes implies a decrease in real and nominal GDP of around four dollars per dollar of revenue raised,” the Treasury economists wrote.

While some economists support cutting company taxes because it would boost GDP, others believe that it would reduce welfare. Also from the same article:

Victoria University senior researc­h fellow Janine Dixon said that while additional investment would flow from a company tax cut, the amount was exaggerated while there was little evidence that wage increases would flow. Lowy Institute fellow and former RBA director John Edwards said any tax cut must be at the expense of tax increases elsewhere.

Indeed, while the company tax cut might raise the nation’s GDP by 1%, Janine Dixon’s modelling showed that cutting company taxes would actually reduce national income – the best measure of living standards – by a commensurate amount:

ScreenHunter_12574 Apr. 13 07.44

This is because cutting company taxes would primarily benefit foreign owners/shareholders at the expense of Australian taxpayers, hence lowering national income.

The historical evidence in Australia also does not support a company tax cut.

A recent report by The Australia Institute (TAI) showed, among other things, that:

  • 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.

Below are the key extracts and charts from this report, which caution against a company tax cut:

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Figure 3 shows that company tax rates increased between the 1960s and 1988 and then gradually fell to the present rate of 30 per cent. Proponents insist that investment will increase with a cut in the corporate tax rate. Yet the other series in Figure 3 shows that, despite the lower tax rate, business investment as a share of GDP has fallen over the period. Business investment accounted for a higher share of GDP in the decade beginning 1959-60 than it has been ever since the trend line clearly slopes downward from 1960 to 1988 when company tax rates peaked. This is inconsistent with the ‘taxcuts-are-good’ thesis…

ScreenHunter_12324 Mar. 29 09.36

Figure 4‘s message is not immediately clear. However, the trend line suggests that growth has declined over the period summarised in the graph. Our analysis of this data shows that economic growth averaged 3.8 per cent in the period to 1988 when corporate tax rates were relatively high, but fell to just 3.0 per cent in the period from 2001-02 when they were significantly lower. Economic growth was almost a full percent higher when company tax rates were 10 per cent higher…

ScreenHunter_12325 Mar. 29 09.37

Figure 5 again shows erratic growth in GDP per capita, and appears to suggest a slightly downward trend. This of course is inconsistent with the proposition that lower company tax rates produce higher living standards. GDP per capital/living standard has/have gradually slowed as the company tax rate has fallen…

ScreenHunter_12326 Mar. 29 09.38

Figure 6 shows that, despite the steady reduction in company tax rates over the period since the 1980s, wages share of GDP has steadily fallen -, by approximately 13 per cent. That evidence suggests the opposite of the thesis that it is workers who would benefit from the reduction in the corporate tax rate. Indeed one might wonder why the business sector would be so concerned about reducing company tax rates if it is workers that would primarily benefit…

ScreenHunter_12327 Mar. 29 09.39

Another regular argument of the ‘tax-cuts-are-good’ thesis is that foreign investment will increase. That claim can be tested by examining the record of foreign capital inflow as has been done in Figure 7.

The results presented in Figure 7 appear to show that foreign investment increased as a share of GDP in the period to the late 1980s when company tax rates were relatively high. After that, the level of foreign investment remains steady, even as the company tax rate was gradually reduced. This is despite the mining boom, which should have increased the level of foreign investment.

Separately, TAI has noted that the Turnbull Government’s plan to cut company taxes would deliver $7.4 billion to the big four Australian banks:

ScreenHunter_12877 May. 09 13.37

“Cutting company tax rates delivers a massive windfall to an already highly profitable banking sector,” Executive Director Australia Institute, Ben Oquist said.

“It makes no economic or budget sense to deliver the big 4 banks a multi-billion dollar tax break when Australia already has a revenue problem.

“If your agenda is jobs and growth, targeted industry assistance would deliver a much greater return on investment,” Oquist said.

The Turnbull Government’s policy hardly seems like a ‘slam dunk’, does it?

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Comments

  1. $4 for $1.

    Yeah, right. If that’s what happens, why don’t you cut the rate straight To 25%?

    Collect 5/6 the tax on existing profits, but for each $1 of tax you don’t collect there will be another $4 of “new profits” created. Apply the 25% tax to the new profits and MAGIC, you’ve collected as much tax as at the 30% rate.

    If X is tax originally collected:
    X = [ (X x 25/30) + (4X x 25/30) x25% ]

    You won’t do it because your bullshitting, Malcolm.

  2. “The Turnbull Government’s policy hardly seems like a ‘slam dunk’, does it?”

    Regardless of the economic merits or otherwise of the policy, it seems like a very (Yes Minister style) courageous policy decision to go to an election with given the tiny personal income tax cuts on offer. It’s basically giving Labor tens of billions of dollars worth of extra spending to play with and Turnbull screwed up right from the start when he tried to hide the cost.

    • There is no personal income tax cut! Except for the minority who get paid more than $80k.

  3. Immanuel Kant

    Unions have forced up the price of houses by 30% – brining back the corruption watch dog will fix that.

    http://www.news.com.au/finance/economy/federal-budget/malcolm-turnbull-takes-a-weird-stab-at-addressing-house-prices/news-story/7de4368a45c1dd549755ba86f69850a8

    Sooo – in otherwords, you will crash the market by 30% and destroy the economy. I am absolutely positive you just accused Labor of doing exactly this ?

    I am so confused – are the LNP seriously this stupid ?

  4. What is the point of cutting company tax are there any companies that actually pay the full rate?

  5. In the last table about the gains to banks. It really should include the effect of franking credits. However much companies will save by cuts to company tax rates, their Australian shareholders will largely give it back through income tax.

  6. adelaide_economistMEMBER

    So which of the following actually seems like a bigger impediment to a firm investing in Australia at this point in time – (a.) the corporate tax rate or (b.) insufficient demand?

    And which of the following would be more likely to increase demand – (a.) cutting taxes for heavily foreign owned large businesses which can already access lots of cheap debt/internal cash reserves if they want to expand (b.) cutting taxes for SME only given they are more likely to depend on internal capital generation to fund expansion or (c.) cut income taxes, especially for low and middle earners, who will then go and spend money and generate economic activity?

    The politics here are pretty obvious or should be – a wink and a nod to the big end of town where the government will make a show of ‘cracking down’ on tax evasion but in return we’ll hand you twice as much back in tax savings all while we pretend it’s about future prosperity for you and your kids.

  7. ““It is very clear that as you reduce business taxes you will get more investment and more employment,” Mr Turnbull said.”
    This guy needs to be called out on this. There is no empirical evidence that the trickle down theory is relevant. None. Even the IMF have admitted it is a false claim http://money.cnn.com/2015/06/15/news/economy/trickle-down-theory-wrong-imf/
    and here https://psmag.com/the-imf-confirms-that-trickle-down-economics-is-indeed-a-joke-207d7ca469b#.eq7g3y3p1
    Can someone get this fool off the stage?

  8. Malcolm’s right
    For every business owner that gets these tax breaks, that’s four negetivily geared properties they can buy