It’s the policy that just won’t die!
Members of the Business Council of Australia’s (BCA) board and the CBA’s chief have once again called for the corporate tax rate to be reduced in order to lift the nation’s economic growth rate to at least 3%. They argue that the economy needs to expand at such a rate to increase wages and create jobs. From The AFR:
Company tax cuts remain the only lever available to government to boost a slow growth economy back to the 3 per cent plus levels needed to lift both wages and employment, says the Business Council of Australia…
The difference between 2 per cent and 3 per cent growth didn’t sound like very much, BCA president Grant King said. But it represents 30 per cent more growth…
“What’s fair?” Mr King said. “What’s fair is an economy that creates jobs at a rate greater than they’re being lost”…
Commonwealth Bank chief executive Ian Narev argued people also needed to consider the impact corporate taxes had on household income growth.
“An estimate that I saw the other day suggested that $30 billion of dividends were paid out of Australian companies to Australians last year,” he said.
“That is a vastly under-understood and under-talked about contribution to income growth, household income growth and consumption in the economy,” he said…
“We need to create new jobs. We need investment to create new jobs. We want to see income growth. We need investment to drive income growth. The only lever to pull is taxes to change, you know, the economics and investment.”
The above arguments used to support company tax cuts do not pass the laugh test.
First, the Australian Treasury’s own modelling showed minimal benefits to either jobs or growth from the Coalition’s company tax cut plan. 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.
Second, the company tax cut would cost the Budget a lot: literally tens-of-billions of dollars. This money would need to be made up somehow, such as by raising personal income taxes, cutting government investment in infrastructure, or slashing welfare expenditure. Such cuts would necessarily reduce jobs and growth.
Third, because of Australia’s unique dividend imputation system, the lion’s share of the benefits from cutting company taxes would flow to foreign owners/shareholders, thus representing a direct fiscal transfer from Australian taxpayers to foreigners, and lowering national income in the process. Moreover, because of dividend imputation, cutting the company tax rate will not materially boost dividends flowing to domestic shareholders.
Fourth, as The Grattan Institute has pointed out, if companies pay less tax then they might reinvest some of what they save. But in practise, most profits are paid out to shareholders. So the tax cut won’t have much of an impact on domestic investment or jobs.
If the federal government genuinely want to boost investment, jobs and growth, it would make far more sense for it to use the tens-of-billions of dollars that would be spent on cutting company taxes to undertake critical infrastructure investment and restore Australia’s dilapidated infrastructure stock, which is under siege from its own mass immigration agenda.