Australian Treasury releases new dodgy modelling on company tax cuts

By Leith van Onselen

In February 2016, The Australian Treasury released modelling on the Turnbull Government’s plan to cut the rate of company tax from 30% to 25% over 10 years.

This modelling estimated that the full company tax cut package would cost the Budget some $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”.

This modelling also found minimal impact on either jobs or growth, with Australia gaining the equivalent of one quarter’s economic growth from the tax cuts by 2038, as explained by The Australia Institute’s chief economist, 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.

The Grattan Institute has also pointed out that if companies pay less tax then some could reinvest some of what they save. But in practice, most profits are paid out to shareholders. So the tax cut won’t have much of an impact on domestic investment or jobs, despite its huge impact on the Budget.

The ABC’s Stephen Long also expertly dissected the Treasury modelling’s various dubious assumptions, which are totally detached from reality, as well as explained the minuscule ‘benefits’ that would arise under the Coalition’s plan.

Not content with last year’s modelling effort, the Australian Treasury will reportedly release new modelling of the company tax cuts, which now show greater benefits. From The Australian:

The full rollout of the Turnbull government’s company tax plan will deliver a $30 billion revenue return to the federal budget, effectively halving the claimed total cost of the policy, according to an official Treasury report to be ­released today.

The report also warns that Australia could suffer a “permanent reduction in the level of GDP and real wages”…

The government is likely to seize on the official research ­report to try to shift the focus back to economic management…

The report, obtained by The Australian, undermines Labor’s argument that the budget could not afford the full extent of the government’s tax cuts, while warning that a do-nothing ­approach would cripple Australia’s international competitiveness…

The report suggests the claimed $65bn price tag for full implementation of the Enterprise Tax Plan — to reduce the rate from 30 to 25 per cent for all businesses by 2026 — would be offset by up to $30bn in extra tax revenue back to the government due to increased economic activity…

“Australian Treasury modelling estimates that the size of the Australian economy is expected to permanently grow by just over 1 per cent in the long term due to a five-percentage-point reduction in the Australian corporate tax rate,” the research paper says. “In the modelling scenario, the total revenue loss from the company tax cut that is recovered in the long run through increased economic growth is estimated to be around 45c per dollar of net company tax cut.”

This just goes to show why results from economic modelling should always be taken with a huge pinch of salt. The group conducting the modelling can get almost any answer they want simply by tweaking the assumptions.

Less than two years ago, the Treasury’s modelling showed almost no economic benefit and huge budgetary cost from the Coalition’s enterprise tax plan. But now its new modelling shows a much bigger boost to long-run economic activity (albeit still tiny at just 1%), as well as a much smaller budgetary cost.

What gives? Why the sudden turn around?

The answer probably lies in the fact that the Turnbull Government is desperate for a win and has instructed the Treasury to provide a favourable assessment to give it the cover to ram the company tax cuts through parliament on behalf of its big business backers.

The reality on the ground has not changed, however.

Australia’s unique dividend imputation system strongly undermines the case for company tax cuts, since 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.

The Coalition’s claim that cutting company taxes would stimulate wages growth is also highly spurious. As noted by Saul Eslake last month, there is minimal link between company profits and wages growth:

…there is little data to support the idea that wages and profits are connected.

The Conversation/Author provided, CC BY-ND

There does not appear to be any “leading” relationship between growth in pre-tax company profits and growth in wages, even if the mining sector (which accounts for a good deal of the fluctuations in profit growth over the past dozen years) is excluded.

The Conversation/Author provided, CC BY-ND

Some relationship between profit margins (that is, profits as a proportion of sales revenue) and wages might have existed in the past. However, that appears to have broken down in the years since the peak of the commodities boom, in 2011-12, as you can see in the following chart.

Since then, aggregate profit margins have risen to levels not seen since the early 2000s, but wages growth has continued to slow.

The Conversation/Author provided, CC BY-ND

Rather than being a precursor to faster growth in wages, the growth in Australian company profits in recent years appears to be part of a broader global pattern: the share of aggregate income accruing to capital is rising while that accruing to labour is falling.

…there’s absolutely no evidence that preferentially taxing small businesses will do anything to boost innovation, productivity, investment or employment. Hence, there’s no reason to think it will do anything to lift wages growth.

Nor is there any compelling empirical evidence to suggest that across-the-board tax cuts for larger companies will have any significant impact on employment and hence on wages.

Rather, an acceleration in wages growth is more likely to come from policies that directly boost economic and employment growth – such as increased spending on (well-chosen) infrastructure projects – and that boost productivity growth (including well-targeted education and training initiatives).

A more controversial proposition may be that measures designed to reverse, in part, the shifts in the shares of national income accruing to labour and capital over the past decade or so could also help accelerate wages growth.

Partly because real wages have grown more slowly than labour productivity since the turn of the century (as you can see in the previous chart), the “profits share” of Australian national income is well above its long-run average. The “wages share” is close to a record low…

The Conversation/Author provided, CC BY-ND

While labour has been doing a good job, as evident by its strong productivity performance, its efforts are getting killed by dismal capital productivity as savings are massively mis-allocated into profitless houses, profitless energy and a profitless government that wouldn’t know a reform policy if it ran over it in a bus.

Therefore, the last thing that Australia should do is lower the company tax rate, which would unambiguously benefit the wealthy and worsen inequality.

Rather than this blind faith in flawed ‘trickle-down’ economics, Australia needs tax reforms that encourage capital to be once again deployed into productive investments.

Alternatively, the federal government could 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.

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