AlphaBeta’s company tax cut findings may actually support Labor’s policy

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By Leith van Onselen

The media is awash today spruiking analysis by economic consultancy, AlphaBeta, which suggests the Turnbull Government’s initial company tax cuts may have boosted both investment and jobs.

This analysis, which was commissioned by accounting software and online bookkeeping provider Xero, shows that companies with turnovers of less than $2 million, which received the first round of corporate tax cuts, increased investment and jobs compared with those companies above the $2 million threshold that did not receive the company tax cut.

Below are key extracts from AlphaBeta’s study:

What’s the impact of company tax cuts on Australian businesses? Do companies hire more workers, increase wages and boost investment after tax cuts?

Until now, the tax debate in Australia has been heavy on opinion but light on facts.

A new report by AlphaBeta and Xero released today answers these questions by directly observing how Australian businesses responded to recent company tax cuts, using the latest small business data from Xero, Australia’s leading cloud-based accounting software platform, which hosts the accounts of hundreds of thousands of Australian businesses.

This is the first time such data has been used and is the first evidence-based conclusion on the impact of tax cuts.

TAX CUTS INCREASED JOBS BUT NOT WAGES

In 2015 corporate taxes were cut from 30% to 28.5% for Australian companies with turnover below $2 million (90% of all incorporated companies). Xero data allows us to observe what tens of thousands of firms did with their tax cut.

The most important finding is that firms that received the 2015 tax cuts hired slightly more workers than similar firms that did not, but had virtually no impact on wages.

The average benefit of the tax cut was $2,940 for firms near the turnover threshold, of which:

  • 19% was used to hire more workers
  • 3% was used to raise workers’ wages
  • 27% was used to lift investment
  • 51% was retained for boosting cash reserves, paying down debt, lifting dividends or other purposes.

My major issue with these results is that over the same period as this analysis takes place, the Turnbull Government also expanded accelerated depreciation for small businesses with turnovers below $2 million, which aimed to “provide a boost to small business activity and investment” (Budget measure below):

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Obviously the boost to investment and jobs could have come from this Budget measure, rather than the reduction in company taxes. Indeed, it was rerun from the year before because it did just that.

If so, then AlphaBeta’s results could equally be used to support Labor’s policy, which has proposed an Investment Guarantee under which “all businesses in Australia will be able to immediately deduct 20 per cent of any new eligible asset worth more than $20,000, with the balance depreciated in line with normal depreciation schedules from the first year”.

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Labor’s policy has been costed by the Parliamentary Budget Office at around $1.7 billion a year – well below the Coalition’s company tax cut package – and should deliver far more ‘bang for the buck’.

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About the author
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.