Company tax cuts won’t “cut inequality”

By Leith van Onselen

The debate over the Turnbull Government’s company tax cut agenda has gotten even more bizarre, with economist Professor Richard Holden seizing on new research from Germany claiming that cutting company taxes actually lessens inequality. From The AFR:

…a recent empirical study by three German economists, published in the flagship American Economic Review… find that higher company taxes reduce wages most for the low-skilled, women, and younger workers. Overall, this implies that once the hit that workers take from company taxes is factored in, personal income-tax-systems in countries like Germany and the US are as much as 40 per cent less progressive than one would otherwise have concluded.

These lessons are highly applicable to Australia. The authors are even able to test how different labour market institutions – like collective bargaining at the company and industry level (enterprise bargaining) – affect the nexus between taxes and wages. They find that there are stronger wage effects for firms that collectively bargain – just as theory would predict. That’s because this form of collective bargaining allows workers to share a portion of the economic pie created by both them and the company: and taxes shrink that pie. Australia’s enterprise bargaining system fits right in with this.

The striking implications of how high company taxes can undermine the progressivity of the income-tax-transfer system certainly apply to Australia, too.

The best, most credible evidence we have suggests that a cut in the Australian company tax rate is not a gift to the so-called “big end of town”. It provides a benefit to businesses and workers in fairly equal measure. And the benefits to workers tend to flow disproportionately to women, young people, and the less skilled.

Cutting the Australian company tax rate from 30 per cent to 25 per cent is not just good for business, and workers. It is also helps to redress economic inequality. Surely this reform is something that deserves across-the-board political support when it comes before Parliament again this year.

Sounds like a slam dunk, doesn’t it? Not really. Professor Richard Holden has forgotten to mention that Australia’s tax system is unique in that it has dividend imputation, whereas Germany does not (Germany abolished dividend imputation in 2000). This means that any reduction in corporate taxes will not materially benefit Australian business owners/investors. Effectively, any cuts to the company tax rate will be largely offset by commensurate cuts to franking credits, as explained by former Treasurer and Prime Minister Paul Keating:

“Australia’s dividend imputation system works such that the company tax is, in effect, a withholding tax – a tax temporarily held by the Commonwealth which is returned to shareholders when their dividends are paid. So, whether the company tax is withheld by the Commonwealth at a rate of 30% or 25% is immaterial – the Commonwealth is going to return the money to shareholders anyway, regardless of the rate. But the shareholders who will receive a benefit are foreign shareholders”.

As noted by Keating above, the prime beneficiaries of a company tax cut will be foreign owners/shareholders, since they do not receive franking credits. By extension, larger corporations would benefit from company tax cuts at the expense of small businesses. This is because around 98% of small businesses (i.e. those employing four or less people) are wholly Australian owned and, presumably, indifferent to slashing the company tax rate. By contrast, 30% of large companies (i.e. those employing more than 200 people) are at least partly owned by foreigners, who would be the primary beneficiaries from the Coalition’s policy.

So, the Turnbull Government’s company tax cut plan would represent a direct financial transfer from Australian taxpayers (via loss of Budget revenues) to foreign owners/shareholders, in turn reducing Australia’s national income. How is this a good deal?

Moreover, Holden has not given due consideration as to how the Coalition’s company tax cuts would be funded. According to the Australian Treasury’s initial modelling, released in early 2016, the full company tax cut package was estimated to cost the Budget some $8.2 billion a year. The Treasury’s more recent modelling, released in November last year, downgraded the cost of the Turnbull Government’s company tax cut package to around $4 billion a year.

Either way, the cost to the Budget would be significant and would need to be made up somehow, most likely by increasing the tax burden on workers, as well as cutting expenditure in other areas (e.g. social services). Such actions would necessarily lower growth and offset any benefits to workers from cutting company taxes.

Herein lies the fundamental problem with the Turnbull Government’s company tax cut plan. The Treasury’s own modelling showed minimal benefits to either jobs or growth – primarily because the benefits flow to foreign business owners/shareholder – but a seismic shift in the tax burden from companies to individuals.

Finally, other notable commentators have contended that cutting company taxes would worsen inequality. For example, Richard Vann, the Challis Professor of Law at the University of Sydney, claims that “it’s the high net wealth individuals who will benefit and this is because they will get a lower tax rate on their bucket companies”… “very wealthy Australians would continue to stash family money in bucket companies held within trusts and taxed at whatever the company rate is”.

Former RBA governor, Bernie Fraser, has also expressed concern that cutting company taxes would deliver minuscule benefits “in the never never” and worsen inequality.

In other words, it’s a policy with immediate large direct costs to the Budget but vague potential economic benefits very long into the future.

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Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

Comments

  1. only the removal of incremental income tax will remove inequality……but i guess that offends your commie sensibilities.
    Incremental taxation is the greatest barrier to allow anyone to accrue wealth, but hey maybe its better we all live like peasants just like mother Russia

    • What about the elite tax?
      The elite tax where a person is born in this country and discovers that 90% of the country has already been taxed by elites – i.e. claimed by elites as their own private property.
      It is very taxing for an ordinary person to try to work and “earn” money to buy back a fair share of the stuff from the elites who taxed it via the taxation system. Of course as the person “earns” money much of this is also taxed away in many other forms – such as the one you are most worried about.

    • Nah wealth tax will fix everything and I am not even kidding. To be top 1% in the world by income, you simply need a decent white collar job in an established economy. However to be top 1% of wealthy in the world by assets, it’s something like $700k Euros. The issue isn’t income, it’s wealth. Just like money supply was designed to make sure wealth flows, we need to make sure the same happens with wealth, in particular land assets.

  2. Why are we even aiming for equality of outcome? So long as there is equality of opportunity, that’s all that really matters…

    And anyone arguing that you can’t live a happy, satisfying life on $80k household income a year has their head in the sand (yes, $40k per person not incl super). It’s possible and in fact, rather simple.

    As for the company tax cuts, they’re a joke. Mind you I operate through a discretionary trust with a company as beneficiary, so this would ultimately benefit me…

    • “It’s possible and in fact, rather simple.”
      Please do share how to achieve this.
      Actually I think I know, set up trusts and companies to avoid paying income tax, work for yourself and claim a whole heap of your living costs as business expenses, and use the 80k a year left over to cover only a part of your living expenses?

      • Neither actually.

        If you take a look at your expenses, really take a look, there’s very little you NEED. There’s plenty you want – computers, cars, clothes, alcohol – I don’t know your interests exactly.

        My household income is (gross) $330k, not including any investment returns. Including investment returns at the 17% CAGR, it would go to about $500k a year (again, gross and unrealised gains on the investment side). Our total spending per year is $77k, including rent at 750 per week (far more than I need to spend), with a child, private health insurance for all and a $5k holiday every year.

        What it doesn’t include is ridiculous car spending (single car family, car worth < $10k), very limited eating out and no ludicrous credit card spending. Nor does it include owning a house in what is clearly an overpriced market.

        If we were in the situation where we needed to reduce costs, rent would drop significantly. I could easily drop this to 500 per week (a little further out mind you) in Melbourne's east. That's a $13k drop, reducing our spend to $64k per annum.
        At $40k each a year, you're paying about $4600 each in tax – as a household, that means just under $71k per annum.

        So on a very small wage, we'd still manage to save $7k per annum. Not life changing savings amounts, but 10% saving with limited income is always a good thing.

      • All I can say is if the above is actually true, you are a very sad person with a very sad life, and shouldn’t be telling anyone what is required for a satisfying life.

      • Interesting take… Each to their own opinion of course.

        Other than maybe travel, any other consumption is really not happiness and is actually just progressing hedonic adaptation further and further along.

        I’m 31, with an aim of financial independence in the next 5-10 years. I find spare time to do whatever I like far more enjoyable than a new BMW or the newest Apple product – so I’m prioritizing as such.

        http://Www.mrmoneymustache.com details it pretty well actually.

  3. Misinformation.
    Rubbish put out there to confuse.
    Very very very very powerful entities really want this and want it bad. Professors are cheap and can be bought by the bagful.

    • This.
      If these people were so worried about improving the outcomes of low income people, they’d reform the sky-high effective marginal tax rates for people below $50k (sometimes over 100%), or have discussions about universal basic income (which I’m not sold on, btw). But yeah nah, they’d rather piss in your pocket and tell you its raining.

      • KeenEyeKen, any doubts I had about UBI were cleared when high income pricks started having epic rants against it.

        Look at this prick: https://youtu.be/QxUzTW5dM4o

        An alternative to UBI is an income guarantee of $18k/year via a wage top up scheme:

        So if my income is $6k/year, the ATO would give me $12k/year and if my income is $18k/year, the ATO would give me nothing. But I am not sure if that is politically viable.

  4. change of company rates bit bit = added complexity for the segment that needs less complexity. leaving imputation unchanged = waste of time lowering co rates. in short a typical Aussie tax [email protected] up

  5. SchillersMEMBER

    Apart from the minor annoyance that Australia’s effective company tax rate (what corporations actually end up paying to the ATO) is roughly half the 30% headline rate, there is the issue of “equality”. What evidence is there that lowering taxes reduces inequality? Experience in the UK is illustrative. Corporate tax rates fell from 52% in 1982 to 19% in 2017. Personal income tax rates dropped from a high of 83% in 1979 to 45% in 2013.
    No one seriously argues that these changes brought about an increase in equality. The reverse was the case. Far from “trickling down” to the masses, the benefits of lower tax rates went overwhelmingly to the 1%.