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.
