Andrew Leigh

CHRIS BOWEN, SHADOW TREASURER

ANDREW LEIGH, SHADOW ASSISTANT TREASURER

Big company tax cuts reward the banks and offshore shareholders

The Sydney Morning Herald, 1 May 2018

Sometimes, what people say in private can be different from what they say in public. A report last month reported on a confidential survey of businesses, which asked them whether a corporate tax cut for the big end of town would improve their business prospects.

If you’d been listening to the Turnbull Government spin, you’d think that every company would favour a tax cut. But only half of the companies in the poll said that a tax cut would better secure their businesses prospects.

What would they do with a tax cut if they got one? Again, the Liberal spin would have you thinking more jobs and fatter pay packets. But managers said that a tax cut would be more likely to go to buying machines and paying down corporate debt. Only 7 percent of firms said that they would grow employment. Just 4 percent said they would increase wages.

The simple fact is that the economics of a corporate tax cut don’t stack up. The Turnbull Government’s own modelling suggests that a big business tax cut funded by higher personal income taxes on middle Australia would deliver just a 0.1 percent increase in household income. When would we get that increase? Sometime in the 2030s.

For all the claims that lower-taxed firms create more jobs, the evidence seems to point in the opposite direction. An easy way to see this is to look at the relationship between a company’s job creation rate and its tax rate. It turns out that those Australian companies with a lower effective tax rate aren’t the economy’s employment engines. In fact, firms who use deductions and rebates to get their tax rate below 25 percent shed more jobs than they create.

Given Australia’s system of dividend imputation, the first-round beneficiaries of a corporate tax cut aren’t Australian investors or workers – they’re offshore shareholders. Now don’t get us wrong – we love the fact that foreigners are buying into Australia’s sharemarket. But we’re not sure they ought to be first in line for a handout. If the nation is boosting foreign aid, perhaps we could start with poverty in the Pacific rather than sharp-suited investors in New York and London.

We’ll often hear the claim that the only thing that matters to investors is how our company tax rate compares with other nations. Part of the answer to this is that when the US Congressional Budget Office last year compared our rate with the world’s biggest economies, it ranked us 10th out of 20 – squarely in the middle of the pack. But it also must be the case that foreign investment turns on far more than taxes. After all, most of our foreign investment in recent years has come from nations with lower company taxes than ours. If all that mattered was the tax rate, why would those nations be putting their dollars in Australia?

Rather than a race to the bottom on company taxes, wouldn’t the nation be better to invest in better schools and hospitals, build the infrastructure that our congested cities require, and keep taxes lower on middle Australia? And when it comes to boosting corporate investment, a far more efficient approach is Labor’s Australian Investment Guarantee. According to experts at Victoria University, ‘the investment subsidy is between two and three times more effective as a stimulus to investment than the company tax rate cut’.  

We get that the Turnbull Government locked in a big business tax cut as its signature economic policy in the 2016 budget. But as economist John Maynard Keynes used to say ‘When the facts change, I change my mind. What do you do, sir?’. If nothing else changes the minds of the Turnbull Government, it should be the scandals now emerging from the banking Royal Commission, which they opposed for two years.

On current calculations, one dollar in four from a company tax cut will go into the pockets of the big banks. Could there be a stranger public policy than rewarding the banking sector with a multi-billion dollar tax cut at the same time the sector is going through its biggest shakeout in a generation?

Admitting mistakes is always hard to do. But just as the Royal Commission is asking banking executives to confess their misdeeds, it’s time the Australian public asked the same of the Turnbull Government. 2018 is the wrong time for banks to get a massive tax cut, and the wrong time for big business shareholders to get a massive tax cut. Firms tell us that it won’t boost jobs and wages. Economists tell us the gains will go offshore. Australian can do better than a budget-busting big business tax cut.

Chris Bowen is the Shadow Treasurer. Andrew Leigh is the Shadow Assistant Treasurer. 

Authorised by Noah Carroll, ALP, Canberra