Australian Retailers Association’s executive director, Russell Zimmerman, has joined the lobbying effort to convince the Senate crossbenchers to support the Turnbull Government’s legislation to reduce the company tax rate from 30% to 25%. Zimmerman claims that Australia’s so-called high corporate tax rate hinders the ability of retailers to hire additional staff and increase wages, whereas Woolworths CEO, Brad Banducci, claims a lower tax rate would enable the company to increase its investment in its Australian business. From The Australian:
In a blunt message to Labor and the Senate crossbench, the $310 billion sector that employs 1.25 million people says without a globally competitive tax rate, investment will dry up, creating barriers for jobs growth for younger and entry level workers.
Woolworths Group chief executive Brad Banducci told The Australian it was an undisputed fact that a lower company tax rate in line with the trend emerging in the rest of the developed world would see the company invest more in Australia.
“There is no question that a more competitive corporate tax rate would enable us to invest even more in value for our customers, in our stores and in our local communities,” Mr Banducci said.
“We know these are the things that matter most to our customers, and will ultimately determine our ability to grow jobs and create new opportunities for our team”…
The Australian Retailers Association, representing more than 7500 small to medium-sized businesses as well as large companies, yesterday said the sector was already struggling, with sales growth 1 per cent down on the 50-year average. “The current trading environment has seen many retailers doing it tough,” said Russell Zimmerman, executive director of the ARA.
“At 30 per cent, Australia has one of the highest corporate tax rates in the advanced economic world, making it difficult for retailers to invest in jobs growth and increased wages that would benefit the economy…
“If the corporate tax rate is not reduced to be more in line with our international counterparts, employees and the underemployed will be the ones who suffer, as employees are the heart and soul of retail. Retailers have told the ARA that balancing rising cost pressures with low sales growth and a high-tax environment is becoming increasingly difficult, with some retailers even struggling to pay their rent.
“As retailers are already struggling in a volatile trading environment, the ARA will continue to advocate for a reduced company tax rate before it stifles future employment and growth.”
What drivel.
First, analysis by the US Congressional Budget Office shows that Australia’s average and effective company tax rate isn’t particularly high:
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Second, the notion that cutting the company tax rate would automatically lead to more investment and jobs is absurd. Dr Cameron Murray explains why:
The economic consensus is that taxing companies is bad because it reduces investment in new machines, buildings, vehicles, ships, and other capital equipment, thereby reducing the rate of growth of the economy. After all, it means it costs companies more to save a year’s income in their own accounts, and then spend it on new machines next year.
It’s one of those ideas that seems plausible on the surface. But in fact, one great way to avoid company tax is to make less profit by investing now in new machines and equipment – the exact economic incentive most economists claim comes from removing the tax!
A company that is not investing like crazy is likely to have more profits – they are probably lazy monopolists. I can think of a few, like Telstra, the banks, and some of the big miners.
I’m serious. Here’s a plot of Amazon’s profits. Notice the period of low and negative profits. That’s what you get when you are investing heavily in warehouses, robots, servers, IT, and other large capital projects that are the things that make us more productive in the future. It’s an example of avoiding company taxes by investing!
And yet, cutting company taxes is a love in. Treasury likes it. Many think-tanks like it. Here’s Nick Gruen liking it. But they are all wrong. And they are wrong because their model conflates physical capital – machines, vehicles, buildings and equipment – with financial arrangements. You can’t tax a tractor. You tax only the profits of an entity that may own a tractor to help earn its revenue. The tractor is a cost that subtracts from profits!
If the company buys too few tractors, its profits will be lower because it couldn’t earn the revenue. If it buys too many, its profit will be lower because its costs are higher. The optimal investment in tractors that maximises profit is the same, whether you keep all the profit, or just a share of the profit, because the rest is taxed.
The reason that so many economic models show efficiency gains from company tax cuts is… because they assume it in the first place! They assume that any additional profits kept by the company will all be used to invest in new machines and equipment.
So the efficiency gains all but evaporate if you don’t assume them and actually look at how company taxes actually work.
Third, the Australian Treasury estimates that the Turnbull Government’s company tax cut plan would cost the Budget some $4 billion to $8 billion a year in lost revenue. This revenue will need to be made up somehow – most likely by increasing personal income taxes (via bracket creep). Higher personal income taxes will reduce household disposable income (other things equal), reducing the amount of money that can be spent on retail and nullifying the profit gains to the sector from the company tax cut.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
