A smarter cut than company taxes

By Leith van Onselen

The media is buzzing today with articles lobbying for Australia to cuts its company tax rate.

Over at The Australian, BHP Billiton’s Andrew Mackenzie, Qantas CEO Alan Joyce and Woodside Petroleum’s chairman-elect Richard Goyder have all urged the Senate crossbenchers to pass the Turnbull Government’s company tax cut Bill, warning that failure to do so will reduce Australia’s international competitiveness and deter investment. They also argue that reducing the tax rate for all companies will encourage businesses to hire more staff and increase wages.

Also at The Australian, Finance Minister Mathias Cormann has penned an article arguing that with nine out of 10 Australian workers employed by a private sector business, “their ­future job security, career prospects and wage increases” depend directly on the Turnbull Government’s company tax cut plan.

Meanwhile, over at The AFR, Phillip Coorey notes that the Turnbull Government will wait “as long as it takes” to implement its company tax cut plan because they are vital to the nation’s prosperity.

Thankfully, The Australian’s Adam Creighton – often the smartest commentator in the room – has thrown a wet blanket over the company tax cut debate, arguing that the government would be far better off instead cutting personal income tax rates, since workers would receive an immediate boost to their take-home pay, whereas it could take some years before any cuts to the company tax rate are passed on to employees in the form of higher wages. Creighton also argues that cutting the company tax rate would increase the gap between the highest personal income tax rate and the company tax rate, making the incentive to avoid or evade income tax even greater:

Businesses don’t pay workers higher wages out of empathy or kindness. Economics assumes self-interest, and wages only rise if businesses have to pay their workers more. It’s the invisible hand…

The government should see the Senate’s rejection of the company tax cut as a way out of a sticky situation, a way to devote all the revenue losses pencilled in for cutting company tax to cutting personal income tax. Cutting personal income tax is a tangible, direct way to lift wages, and would be far more popular. In an era of stagnating wage growth it’s the easiest, perhaps only, way for federal government to lift real wages. By contrast, cutting corporate tax would take many years to filter through to workers’ pay packets, when the effect would be difficult to isolate.

Workers in Australia have endured ­almost a decade of bracket creep or rising ­average tax rates, while companies, facing a flat rate of 30 per cent, essentially have not. Cutting tax on wages would leave households with more money to spend on goods and services, helping lift consumption, which has been an economic weak spot. ­Attracting and keeping workers in Australia, especially as travel costs decline, is as important as attracting foreign investment.

Cutting corporate tax should be a lower priority than cutting personal tax…

For Australian taxpayers, because of dividend imputation in operation since 1987, company tax is a prepayment of personal ­income tax… Investment in Australia is domi­nated by Australians, who effectively pay no corporate tax…

There are other problems with cutting the corporate rate. The gap between the top personal tax rate and corporate rate would rise, sharpening the incentive for avoidance and evasion. This is no small problem.

Spot on. As MB has argued from the beginning, the benefits of cutting company taxes would overwhelmingly flow to foreign owners / shareholders, who are not subject to Australia’s dividend imputation system and do not receive franking credits. By contrast, the budgetary cost of cutting company taxes – estimated between $4 billion and $8 billion a year – would be borne by resident taxpayers and would need to be made up somehow – most likely by raising personal income taxes (via perpetual bracket creep).

If the Turnbull Government’s goal is to support wages growth, then the logical policy option is to abandon company tax cuts in favour of personal tax cuts.

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Comments

  1. ErmingtonPlumbingMEMBER

    Yes, I agree.
    I think this tax cut should be, an increase in the tax-free threshold to 40 or 50k/annum.

    People earning this amount already cost their bosses an extra 9% in super (a private tax/loan to the financial services industry) and another 4-6% average in workers comp premiums.
    Also the vast majority of people earning below 50k, spend all their money, putting it back into the economy,…unlike Investor/shareholder tax breaks that mostly just get churned back into bigger “investment portfolios” (Hording!)
    It’s a Fking no brainer!

    • “I think this tax cut should be, an increase in the tax-free threshold to 40 or 50k/annum.”

      That’s WAY too high to be affordable.

    • Ermo, tax-cuts are always a good thing, particularly if accompanied by a dialling back of wasteful Govt spending.

      However, the concept of ‘hoarding’ as a bad thing is one of the more looney Keynesian fallacies. JMK famously suggested that citizens saving (or hoarding) their money was tantamount to modern economic evil and advocated for the “Euthanasia of the Rentier”. In other words, there is no need for savings in the economy as only spending was really important for economic growth.

      While the above suggestion of Keynes’ defies all logic — at least if you give it some proper thought — the idea gained much traction in past decades and the Keynesian loons in charge of our asylum (central banks and Govt) still cling fiercely to this idiocy. In addition, the swivel-eyed Keynesians also believe that all Govt spending — even the wasteful spending — is ultimately positive for the economy.

      No wonder our world is so f#cked up.

      • Hoarding isn’t bad. The issue is which tax cuts will lead to greater economic stimulus. Ermo’s point about a person on a lower income spending more into the economy when given a tax cut is valid. The cuts would also hopefully lead to a reduction of economic stress for many of the recipients which is good for them, those close to them and the community.

      • footsore, I totally get the bit about the less well off spending every dollar they come into contact with — but that mind-set still plays to the spending = economic growth fallacy. Only in a Keynesian world is this true.

        In the real world, economic growth comes from savings and investment without which there’d be nothing to consume. The Keynesian tune is bass-ackward: first came the cart, then came the horse ..

      • A bit of column A, a bit of column B. The hard part is getting the balance right. This suggested cut would just seem to be an extension of what’s been occurring across the anglosphere for the past thirty years. The real world has shown that it doesn’t work, and has led us to this point. So, while removing incentives for capital to productively invest is daft, thinking that providing greater incentives when the system is already geared in capital’s favour is just as daft.

      • Footsore, I think we’re hostage to the mindset that the average human being is an idiot and incapable of making a decision for themselves and that we need to be ‘guided’ by the Govt and their agencies, principally Central Banks.

        I am unapologetically on the side of the argument: 99.9% of human beings are perfectly capable of finding their own way and any Govt or CB interference naturally creates distortions in the economic fabric, which leads to bad decision-making and mal-investments (any bubble you can mention is on such example). Trying to ‘get the balance right’ is something that the economy can work out on its own — no guidance from higher powers necessary. If we adopted the mantra that ALL Govt interference ended up producing bad outcomes I think we’d be more than halfway to solving a lot of the problems we’re faced with today. Markets have the answers, Govts do not — it is simply not possible for them to know or figure out the answers, by definition.

    • +1 …
      So why won’t it happen?
      Something to do with “… who could ever believe a LibNat govt would overlook capital for labour?” … no matter how appropriate it is.

  2. If they really wanted new investment they would provide tax credits for new investment, not give tax cuts for old investment.
    It’s a cover for tax cuts for foreigners who invested years ago.
    Australian share owners won’t benefit because of dividend imputation or the tax status of superannuation funds. In any event most Australians have virtually no shares in their own names.
    Turnbull is the best prime minister foreigners ever had. Huge immigration destroying standards of living,, 457 visas taking Australian jobs, tax cuts that are mainly effective only for foreign investors.
    Labor and Shorten are hopeless at exploting this. Seems they are beholden to the same forces as Turnbull.

    • I’m expecting it to get them over the line. Along with ALP having some internal **** up that Shorten mishandles.

  3. ??? soon there wont be any companies in straya mate:
    The world’s biggest hedge fund has warned last week’s market turbulence, which helped trigger record outflows from global stock funds, was set to continue.
    “There had been a lot of complacency built up in markets over a long time, so we don’t think this shakeout will be over in a matter of days,””We’ll probably have a much bigger shakeout coming.”
    “Last year equity markets had a free run. But this year we are going from central banks contemplating tightening policy to actually doing it,” Mr Prince said.
    “We will have more volatility as we are entering a new macroeconomic environment.”
    Goldman Sachs, emailed that the market probably still has not hit its bottom.
    “Historically shocks of this magnitude find their troughs in panicky selling,”
    I’ve been amazed at how little ‘capitulation selling’ we’ve seen on the desk .
    The ‘buy on the dip’ mentality needs to be thoroughly punished before we find the bottom.”

  4. Exclude foreigners from the income tax free threshold.

    Have a wage top up scheme so that every voter with an income less than $60k is given $5k/year by the ATO.

    So a voter with an income of $10k gets topped up to $15k and a voter with an income of $40k gets topped up to $45k.

  5. It’s hard to imagine that Australian Banks, with an implied govt guarantee, no foreign competition and massively over rewarded senior management who only run a regulated business anyway should have a tax cut. Boosting their profits by cutting taxes encourages them to retain earnings raising rather than raising fresh capital trough DRPs. They issue hybrids and long dated debt to avoid diluting eps and they are about to start slaughtering employee numbers. They export nothing but jobs, distort capital flows and misallocate credit growth into non export earning residential property speculation. At least let superannuants get something back via franking.

  6. I’d much rather see them index the tax brackets to inflation. As you guys have noted here quite a few times, bracket creep is the hidden tax that keeps on giving. If they really want to give us a boost, index it back five years.

    • But our wages have been shrinking for the last 5 years – so there is no bracket creep.

      Foreigners should be excluded from the income tax free threshold though.