Treasurer Scott Morrison has signalled that company tax cuts will be a legislative priority for the Federal Government when parliament resumes in February, citing new OECD research which concluded that across-the-board corporate tax cuts result in increased business investment and “substantial” income gains for all wage and salary earners. From The AFR:
Company tax cuts bring benefits to people at all income levels, an OECD study has found, and do not unfairly favour the rich.
The finding came as Scott Morrison told The Australian he intends reintroducing legislation to cut taxes for companies with turnover above $50 million in the first few weeks after parliament resumes on February 5.
“It is an early agenda item for the new year,” the Treasurer said.
The OECD study backs government arguments that cutting the company tax rate for all companies will boost business investment and contradicts Labor claims that company tax cuts reward those on high incomes.
“Lowering the effective rate of corporate income tax (as part of a tax shift) can deliver substantial income gains for all with few consequences for the distribution of income,” the study says. “No statistically significant effect on the income distribution appears for company income tax”…
The OECD study, based on results in 34 advanced countries between 1980 and 2014, found that lower company taxes encouraged businesses to invest more in innovation to improve their returns…
There are two major flaws with the OECD’s research as it pertains to Australia.
First, unlike most countries, Australia has dividend imputation. This means that the financial benefits from cutting company taxes would flow almost exclusively to foreign owners / shareholders, thereby representing a direct fiscal transfer from Australian taxpayers to overseas, and reducing national income.
Second, the OECD has not given due consideration as to how the Coalition’s company tax cut plan 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 from cutting company taxes.
Herein lies the fundamental problem with the Coalition’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.
It’s a policy with immediate large direct costs and vague benefits long into the future.