Australia Institute launches ad campaign against company tax cuts

By Leith van Onselen

The legends over at The Australia Institute (TAI) have launched the above television campaign against the Turnbull Government’s company tax cut package. Below is the media release attached to the ad:

A TV advertisement which will begin airing nationally today features research from The Australia Institute into the government’s $65 billion dollar company tax cuts plan.

Building on research showing a lack of evidence that company tax cuts promote either jobs or growth the advertisement identifies the likelihood that the gift to the corporate sector will come at the expense of infrastructure and community services.

The Australia Institute is also releasing new polling today which shows 58% oppose the government plan, while just 25% support cutting the tax rate for large companies. In fact when asked if company tax rates should go up or down more people supported increasing the company tax rate than decreasing it.

65% said, dollar for dollar, funding public services is a better way to support employment and economic growth. The sentiment cut across political lines, including a majority of Coalition voters:

“The economic case for company tax cuts is poor. Research shows that a there is no correlation between lower company tax rates, employment or economic growth,” Executive Director for The Australia Institute, Ben Oquist said.

“A multi-billion dollar company tax cut represents an enormous hit to the budget, and it has to come from somewhere. It means either racking up a much bigger deficit or cutting back on critical investments like education, hospitals and infrastructure or likely both.

“The polling continues to show that the politics of company tax cuts are almost as bad as the economics, with support in the Australian public for the government’s policy sinking to new lows,” Oquist said.

“A recent report by Senior Research Fellow at The Australia Institute, David Richardson, analysed data on tax rates from Australia and OECD countries, finding cutting company tax rates did not correlate with economic growth.

“The research did however find that OECD countries with lower company tax rates have lower standards of living, measured as purchasing power of GDP per capita, and that as corporate and company taxes have been lowered in other countries, there has been a rise in average unemployment rates and decline in wages and mixed income.

Regular readers will know that MB has strongly opposed the Coalition’s company tax cut package from the beginning.

First, unlike most nations, 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 overseas, and reducing national income.

Second, the Australian Treasury’s initial modelling, released in early 2016, estimated that the Turnbull Government’s full company tax cut package would 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 Budget to around $4 billion a year.

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

The fact remains that there are far better ways to spend scarce public money than on cutting company taxes.

It is also worth pointing out that research prepared last month on behalf of the Reserve Bank of Australia (RBA) showed that axing negative gearing would significantly boost societal welfare by far more than the Coalition’s policy to cut the company tax rate. Here’s Peter Martin’s summary:

Axing negative gearing would lift home ownership to as much as 72.2 per cent of households, cut home prices by just 1.2 per cent and lift rents “only marginally”…

Melbourne University researchers Yunho Cho, Shuyun May Li and Lawrence Uren conclude that eliminating negative gearing entirely would lead to an overall welfare gain of 1.5 per cent of GDP, making three quarters of the population better off.

The figure compares to a Treasury prediction of welfare gain of 1.2 per cent from Turnbull government’s plan to cut the company tax rate…

An ownership rate of 72 per cent would be the highest since 1991, before 1999 when the Howard government cut the headline rate of capital gains tax making negative gearing more attractive. It currently stands at 66.7 per cent…

Renters and owner-occupiers would be the biggest beneficiaries. Landlords, especially young, high earning landlords, would be the biggest losers…

Renters would benefit because although rents would climb by 2.4 per cent, the government would be in a position to compensate them and others with the extra $2 billion it would make in increased tax revenue…

Young owner-occupiers would benefit from the lower house prices “as they can move up a housing ladder more easily”.

Landlords who rely on borrowings would be “driven out of the market for investment properties”…

Thirty per cent of rental properties would be freed up and bought by Australians who would have otherwise rented. Almost every income group and every age group would increase its home ownership rate.

The full paper is available here.

So why does the Turnbull Government continue to oppose Labor’s negative gearing reforms while supporting company tax cuts?

Labor’s policy would save the Budget some $2 billion to $4 billion a year, versus the $4 to $8 billion cost from the Coalition’s company tax cut policy. Labor’s policy would also raise societal welfare by more.

Equity would also improve significantly under Labor’s negative gearing policy, whereas equity would likely worsen under the Coalition’s company tax cut policy, with the gains flowing primarily to higher income earners.

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