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.
Advertisement
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:
This is because cutting company taxes would primarily benefit foreign owners/shareholders at the expense of Australian taxpayers, hence lowering national income.
Advertisement
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.
Advertisement
Below are the key extracts and charts from this report, which caution against a company tax cut:
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…
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…
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…
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…
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.
“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?
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.
