Income taxes to rise to pay for company tax cuts

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By Leith van Onselen

At the same time as Labor is crowing about rising inequality, Prime Minister Malcolm Turnbull confirmed yesterday that the Coalition would push on with its pledge to cut the company tax rate to 25% for all companies. From The Australian:

[The Prime Minister] turned attention to the government’s plan to cut the company tax rate to 25 per cent, which has failed to pass the Senate. “Our view is tax ideally should be lower; obviously we have to raise tax to pay the bills but nearly all taxes have an economic cost, particularly business taxes,” he said, signalling he would introduce legis­lation to enact the government’s plans before the end of the year.

Earlier, Professor Bob Gregory noted that income taxes would need to rise, in contrast to company taxes:

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Bob Gregory told the conference that personal income tax was expected to rise by a full percentage point of GDP over the next four years and then keep rising. Company tax would increase by half this amount over the next three years but would then start falling as the government’s tax cuts took effect, he said.

“The government has been successful in controlling expenditure — it hasn’t gone up — but it hasn’t been successful in reducing it as a share of GDP,” he said, arguing the government was relying on tax rises to achieve all the improvement in budget outcomes while holding spending steady.

The modelling of the company tax cut package conducted by Independent Ec0nomics on behalf of the Australian Treasury estimated that the full company tax cut package would cost $11.3 billion per year. However, this would be reduced to $8.2 billion due to “a gain in personal income tax and superannuation income tax of $3.1 billion as the cut in company tax automatically reduces the value of franking credits”.

So obviously, the loss of revenue from company tax cuts would need to be made up somewhere: either by raising personal income taxes (most likely) or cutting expenditure on public services.

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Treasury’s modelling also showed almost zero impact on ‘jobs and growth’ despite its enormous cost. 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.

One wonders why the Turnbull Government remains committed to passing the full company tax cut package in the future – despite its huge fiscal cost, immaterial economic benefits, and general unpopularity within the electorate.

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Maybe the answer lies in the fact that the Coalition is in bed with business oligarchs and represents their interests over the broader public.

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About the author
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.