After Treasurer Scott Morrison’s pathetic attempt yesterday to use Donald Trump’s election victory to reignite the Coalition’s company tax cut plan, Labor Leader Bill Shorten has hit back, stepping-up his rhetoric against the cuts. From The Australian:
“What doesn’t generate a brighter future for more Australians is the idea of persisting with Donald Trump-style corporate tax cuts for multinationals and big banks,” Mr Shorten said.
“Labor believes the best way to prioritise jobs is to look after working class and middle class families with a strong safety net, a strong minimum wage, good superannuation, a properly funded pension system, good skills and education for our young people and workers seeking to be retrained, investment in infrastructure.
“That’s how you build a growing economy and you ensure that fairness is at the core of everything you do.
“What you don’t do is practise trickle-down economics where you spend $50 billion of taxpayer money giving a tax cut to large corporations, to the big banks, and we’ll see little return for the rest of Australia.”
Asked whether he was concerned a 15 per cent corporate tax rate would make Australia uncompetitive, Mr Shorten said he was more worried about Mr Turnbull “seeking to use Donald Trump-style tax cuts as the basis for our economic policy”.
“The economic modelling shows that there will be a negligible, a microscopic bump in improvement in a decade’s time if we hand away $50 billion of taxpayer money in corporate tax cuts,” he said.
“Mr Turnbull’s Donald Trump-style corporate tax cuts was a crazy idea at the budget, it was a crazy idea during the election and it was a crazy idea since then, and I think even people in the government know it’s a crazy plan because they’re not doing a lot to proceed with these tax cuts, are they?”
Well said. This whole notion that Australia should slash company taxes because the US might is flawed by the get-go. Australia is one of only a few nations in the world that has dividend imputation, which makes direct comparisons of company tax rates with other nations largely redundant.
As explained by the Grattan Institute in September:
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Australia’s unusual dividend imputation system means that when profits are paid out, they are only taxed at the domestic investors’ personal income tax rates. A company tax cut does not help them much since their effective company tax rate is already close to zero. This system is known as a franking credits regime and other few developed countries have it.
Most countries tax corporate profits, and then investors also pay personal income tax on the dividends (albeit sometimes at a lower rate). As a result, although Australia has a relatively high headline corporate tax rate compared to our peers, in practice the comparable tax rate is lower – at least for local investors.
By contrast, corporate taxes have a much bigger economic impact in other OECD countries where they reduce the rate of return for local investors. International comparisons show that Australia has a median level of taxes on corporate profits for local investors when both company taxes and individual income taxes are considered (Figure 1).
Consequently, many of the international studies about the economic impacts of cutting corporate tax rates do not readily apply to Australia…
Foreign investors, on the other hand, do not benefit from franking credits. They pay tax on corporate profits twice: first at the company tax rate, then as income tax on the dividends at home (potentially at a discounted rate). Therefore a cut to the company tax rate provides bigger benefits to them. For those who have already made long-term investments in Australia, a reduction in the tax rate would be a windfall.
Indeed, because of this dividend imputation system – which will give the lion’s share of benefits from cutting company taxes to foreign owners/shareholders – Australian national income would very likely be reduced by cutting company taxes:
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And then there’s the huge cost of cutting company taxes – likely to be in the tens-of-billions of dollars – which would need to be made-up elsewhere, either by cutting government expenditure and/or raising taxes (most likely personal income taxes).
Finally, even the modelling used to support the company tax cut showed minimal benefits to either GDP or employment, as explained by The Australia Institute’s Richard Denniss:
According to Treasury’s in-house modelling, and the modelling it commissioned from Chris Murphy, if the company tax rate is lowered from 30 per cent to 25 per cent then gross domestic product will double by September 2038, while without the tax cut it won’t double until December 2038. Wow, a whole three months earlier. Both modelling exercises conclude that in 20 years’ time the unemployment rate will be 5 per cent regardless of whether we spend $50 billion on company tax cuts or not…
The “benefits” are more accurately described as rounding error than significant reform.
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The Coalition would be wise to junk its company tax cut plan. It makes little sense economically. The opposition parties do not support it. And it is unpopular among the electorate.
In short, the are far greater national priorities than cutting company taxes. The Turnbull Government needs to take its blinkers off.
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.
