Yesterday, business groups once again demanded that parliament approve the Turnbull Government’s policy to drop the company tax rate to 25% from 30%, warning that it “must change or we’ll lose investments to the US”. From The Australian:
…former Business Council president Graham Bradley said while some had discounted the chances of certain promises by US President Donald Trump being met, “we now have to face the reality” of the move.
“There’s a global movement to reduce tax rates generally but corporate tax rates in particular,” he said. “I believe this is governments seeking to restimulate business investment as we start to see interest rates rise from their historic lows post-GFC”…
KPMG tax partner Grant Wardell-Johnson said Australia’s 30 per cent corporate tax rate was “looking very uncompetitive compared to a 21 per cent tax rate”.
“We need to rethink our longer-term tax rate in the light of what has happened in the US,” he said. “Unless we lower our corporate tax rate, we are going to have less investment in Australia.’’
Australia’s ambassador to the US, Joe Hockey, said the cut in the headline tax rate would act like a “magnet” for capital back to the US.
He last week told the Financial Services Council in Sydney that the tax package would be a “game changer” for all countries that competed with the US for investment…
Business Council chief executive Jennifer Westacott yesterday called for parliament to support the rest of the government’s plan, saying “it has become even more urgent with the US congress finalising historic cuts to business taxes”.
Today, macroeconomists from ANU’s Crawford School of Public Policy, Dr Andrew Stoeckel and Dr Warwick McKibbin, have warned against lowering company taxes, claiming that the US’ policy won’t help it long-term and to follow the US’ lead would make Australians worse-off. From The AFR [my emphasis]:
Cutting corporate taxes from 35 per cent to 21 per cent will boost after-tax profits. This boost increases the return on capital, encouraging firms to invest. Some of the extra profits will find their way to shareholder dividends, some to higher wages through higher labor productivity, boosting spending. On top of that, personal income tax cuts will also lift spending. There will be a boost to economic growth and employment – at least in the short term.
Sound too good to be true? The bad news is that there are more economic effects. The tax cuts are largely unfunded and will increase the budget deficit and national debt. Financing this extra deficit will lift interest rates. Some of the extra funds borrowed by government and business will come from offshore, boosting capital inflow, lifting the currency and worsening the US trade deficit.
…while some effects boost growth; others detract from it. We recently explored these issues in a CAMA working paper called “Some Global Effects of President’s Trump Economic Program”…
The effects of the tax cuts will be to expand the US fiscal deficit… Consumption and investment rise strongly, as intended, in the first year of the cuts. The effect is short-lived, however… There is higher growth initially but lower growth over time. The short-term benefits come at the expense of the future, an effect that is pronounced when we consider incomes of Americans (GNP). While GDP remains above baseline (production is higher), income as measured by GNP is below baseline by year 5. By 2030 US GNP is a full per cent below what it would have been otherwise. Simply, there is more production activity in the US but the scale of borrowings means more of the US production capacity is owned by foreigners. Over time, in income terms, Americans are worse off…
Extra borrowing causes real long-term interest rates to rise by up to 70 basis points above baseline over the long term. The extra capital inflow worsens the current account and trade deficits… Exports from all sectors are lower than otherwise…
For Australia there are the same positive and negative forces at play… For Australia, the best response is not to match the US tax policy but to focus on policies that raise productivity…
It’s time to abandon the Turnbull Government’s idiotic company tax cut package, which would gift foreign-owned corporations billions in tax relief (at the expense of Australian taxpayers), while doing precious little to boost either jobs or growth.
