Morrison continues ‘trickle down’ tax cut charade

By Leith van Onselen

Treasurer Scott Morrison went on the attack in Parliament yesterday, claiming the link between company tax cuts and higher wages was “pretty simple”:

“If you want businesses to pay workers more, you don’t force them to pay the government more,” Mr Morrison told parliament.

“If you want businesses to spend more on employing more Australians, you don’t force them to spend more on higher taxes being paid to the government. The Labor Party is standing between a wage rise and Australian workers.”

…“Business is making it very clear,” Mr Morrison said.

This generated a strong rebuke from former Prime Minister, Kevin Rudd, who said that the business sector must demonstrate the benefits of an across-the-board company tax cut and commit to a ‘social contract’ lifting wages:

…former Labor prime minister Kevin Rudd expressed doubt companies would use lower takes to pay higher wages.

He reflected on his time in office when he agreed to cut foreign withholding tax from 30 per cent to 7.5 per cent because fund managers had told him they needed rates that were competitive with Singapore and others to boost their offshore investment.

In our first budget, we cut it by half into 15. Second, we cut it by half again, to 7.5 per cent. The Singaporeans nearly died,” he said.

“(But) those who went offshore to engage in building the Australian export base, I could have counted on half a hand. There’s a big question for corporate Australia.

“What is corporate Australia going to do? Stick it in its back pocket? Increase wages? Invest and grow the scope of their enterprises, create new export industries for Australia?”

One Nation leader, Pauline Hanson, was also under fire yesterday after she last week doomed company tax cuts in the Senate.  But rather than bowing to the pressure from the government and some commentators, Ms Hanson dug in, arguing that the Government will need to show that the tax cuts will result in both higher wages and profits, as well as maintaining that reducing the company tax rate would result in lower franking credits for Australian investors. Ms Hanson also called for the government to instead use the money earmarked for company tax cuts to lower payroll taxes:

[Ms Hanson] said if businesses returned the company tax cut as higher profits, that would be at the expense of higher wages, which is one of the key selling points of the tax cuts.
“You can’t spend the money twice,” she said.

Senator Hanson, who is being advised by a former Australian Tax Office official now on her staff, said it was up to the government to produce modelling showing the cuts could boost both wages and profits but she was sceptical…

Senator Hanson has told the government during negotiations she would rather some or all of that money be used to compensate the states for paring back their dependency on payroll tax, a move she believes would create more jobs than a company tax cut.

Even Robert Gottliebsen has chimed in arguing that investment allowances would do far more to boost business investment than company tax cuts:

Non-mining investment in Australia is at a 58-year low at just nine per cent of GDP. This will lock Australian shares into a generation of underperformance to the rest of the world which is “going full steam ahead” into a technology-driven investment and research revolution of incredible proportions…

So in the national interest I ask every one of the 150 members of the Business Council of Australia to think deeply and ask themselves one simple question: What would be best way for Australia to overcome its greatest weakness —lower company tax or to increase investment allowances, accelerated depreciation and research deductions?..

Let me be brutally frank.

Handing our biggest taxpayers, banks, miners and retailers a fist full of cash, where in the case of Australian-owned companies shareholders will demand higher dividends, is not an efficient way to boost investment.

As MB has argued repeatedly, the arguments used by the Turnbull Government and businesses to lower company taxes simply do not stack up.

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 to overseas, and reducing national income.

Second, these proponents never give 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 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.

Third, these proponents conveniently fail to mention that Australia’s average and effective corporate tax rate is already far more competitive than the United States’. Here’s the US Congressional Budget Office’s analysis via Ian Verrender:

In short, any across-the-board company tax cut would largely benefit foreign investors, while any possible boost to the economy would be offset by the need to lift other taxes to make up for the revenue lost by cutting corporate 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.

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Comments

  1. Rudd gets +10 points for his real world example of tax cuts giving no international competitive edge. Markets are not sufficiently homogeneous to make tax a deciding factor. Outside a tax haven I have bigger reasons to invest in a country – like people who might buy my products and services in the first place! What a bunch of propaganda that argument is. Also +10 points for the “show us the facts” calls from the others. Finally some REAL policy debate. However, the “ if you want to give individuals a tax cut – how about just giving individuals a tax cut” line from Adam Creigton is the best yet for cut through and political force. +1000 Adam.

  2. Maybe this is the new Pauline Hansen – someone who actually understands the issues? It would be nice to think so. But Rudd is always a Big Australia man, so his defence of living standards is ultimately compromised.

  3. Jumping jack flash

    The problem is the debt.

    Everyone has enormous quantities of debt.
    The first ones who get hold of any extra money will use it all up to pay down their debt.

    This is why I quite like the idea of income tax cuts. The extra money goes directly to everyone so they can use it to pay down their debt without waiting for the crumbs to fall off the elite’s table.
    With company tax cuts, the temptation is there for executives to make off like bandits with the extra cash and use it for their own debt. Because, everyone has ridiculously huge quantities of debt, even executives.

    When you add in gargantuan amounts of personal debt to the already dubious trickle-down equation, everything totally stops working with any kind of sanity or logic. Everyone gets all grabby and wants to pay back their own debt obligations.

    Of course, the fundamentally flawed statistics will show resounding success, because on average wages will rise even if those rises are concentrated to the executive sphere.

    • If individuals just use the tax cut to pay down debt, then there is no point – you are just substituting government debt for private debt.

      • Which is useful, there is no reason why a government shouldn’t have a debt obligation and it would benefit the wider economy if the government took on private debt freeing up future earnings to actually be spent on someone other than banks.

        Doesn’t do us much good if the government takes on more debt for an executive handout. Profits and wages have already been demonstrably disconnected. I don’t know why more people don’t bang on about this more. Plenty of profit + a corporate tax break + consistently stagnant wages =/= rising wages.

    • @ Jumping jack “The first ones who get hold of any extra money will use it all up to pay down their debt>’

      Or incur more debt. They can use that extra money as a deposit on yet another property, pushing up prices even more..

  4. Morrison is right, it is simple (his words)
    I know last time me and my mates got a tax cut from the govt years ago from our wages we went out and spent the savings buying stuff and going out of our way to pay HIGHER prices to strangers (ie businesses) cause we had more in our pocket from tax cuts….this is exactly what businesses will do they will spend more on the same input costs ie wages, cause they got more in their pocket from tax cuts and it is the Australian way to do this…makes sense,
    Adam smith doesn’t know what he is talking about when he says we look after own self interest…idiot.. Everyone knows when you get cut in tax you splash the savings around on strangers and workers wages rather than try save tax cuts so pay out higher dividends to shareholders (part of directors fiduciary duties to maximise dividends)…Morrisson knows his economics…he should be listened to rather than adam smith…and who cares if he not give evidenmce to support what he says…his confident look is all I need to to know he is correct
    and also we owe big business big tax cuts…we have not allowed them to bulk up even more and become monopoly in each industry…instead they are hampered by only being allowed to be duopolies or oligopolies…they cannot extract as much economic rent as possible compared to being single monopoly…therefore we owe them…if it weren’t for them and they left our shores we would die of hunger and cold etc from not having stuff…maybe they should withhold their stuff until we come to our senses…Atlas shrugged is the way forward…give them tax cuts and allow them to become monopolies and extract more economic rent or they will withdraw their stuff from us…consumer demand wont go away but supply will (cause nobody could ever step in and do what they do) ….how on earth will we survive….ayn rand was right as was that laffer curve guy (he still has napkin that he drew on to show reagan to prove it)…that’s all the evidence morrison needs

    • Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut enim ad minim veniam, quis nostrud exercitation ullamco laboris nisi ut aliquip ex ea commodo consequat. Duis aute irure dolor in reprehenderit in voluptate velit esse cillum dolore eu fugiat nulla pariatur. Excepteur sint occaecat cupidatat non proident, sunt in culpa qui officia deserunt mollit anim id est laborum.

    • The evidence that we live in a miserable desperate times that nowadays you could not distinguish between sarcasm and opinion 🙁

  5. Morrison … poor simple man can’t get it but Hanson now does! (As it sounds like she is actually listening to advice from an expert while Morrison just ignores experts & pulls it out of his arse!)

  6. Well yes, Mr Morrison seems to be trickling down crap all over the honest worker. He doesn’t have to do it. But he genuinely believes he should, almost as a form of remediation. He is a strange bloke. He genuinely believes Jesus was middle-class and proper. Never heard of the social justice gospel. Can he read? Does the thinking part of his brain actually work? It is a mystery to me.