Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016

Second reading speech

9 February 2017 

In my remarks today, I want to deal with the three arguments that the coalition has made for cutting the company tax rate: the first, that Labor once supported cuts to the company tax rate; the second, that other countries have lower corporate tax rates; and the third, that it will boost growth. I want to explain to the House in turn why each of these arguments is wrong.

The coalition first of all claims that Labor, in the past, has supported company tax rates. It is certainly true that Paul Keating took the approach of broadening the base so you could lower the rate. Against the opposition of Liberals and Nationals at the time, Paul Keating brought in things like capital gains tax and fringe benefits taxation. He ensured that our tax base was broader and, in so doing, was able to finance a rate cut. This broadening of the corporate tax base was the same philosophy that underpinned the Gillard government's approach, and then we said at the time we would support a modest reduction in corporate tax of one or two percentage points.

What has changed since then? Unfortunately, a lot has changed since then. In 2013, net government debt in Australia was $184 billion; now, net government debt is $317 billion. Net debt has increased by $113 billion since the coalition came to office. How much is that? That is about $4,500 for every man, woman and child in Australia. So everyone listening to this debate today will be listening knowing that the Liberals have increased the government debt each of them owes by $4,500. If you need an answer to the question, 'Why is now a bad time to cut the corporate tax rate?' the simple answer is: '$4,500 of Liberal-National debt'.

What have they done about that? Have they pulled the debt truck out of storage, maybe upgraded it to a debt B-double? No. They no longer talk about debt. They no longer claim that it matters. But, according to modelling—which did not come out at the time of the budget but was dragged out of the Liberals and Nationals—this is a $50 billion corporate tax cut. According to modelling by Independent Economics, it is a tax cut costing $48.2 billion and, when it is complete—when it is ripe—its annual cost will be $8 billion. That is a massive hit to the government coffers at a time when the government have sent debt soaring. The Liberals and Nationals used to talk as though they cared about debt; now they simply increase debt and say, 'It is no longer a problem; we can just cut the tax base.' That is the philosophical approach that Ronald Reagan took in the 1980s: just ramping up debt, cutting taxes and leaving the problem to someone else. Labor cannot support a cut to the company tax rate when the Liberals and Nationals have so badly increased debt in this country, from $184 billion to the $317 billion currently projected in MYEFO, a near doubling of Australia's government debt.

The next argument they make is that other countries have lower corporate tax rates than Australia and Australia's corporate tax rate is uncompetitive. We can easily move through countries which enjoy strong economic performance yet have corporate tax rates higher than 30 per cent: France, 33.3 per cent; Japan, 30.86 per cent; the United States, 40 per cent. Corporate tax rate comparison across countries is invariably problematic, so here I am drawing on 2016 numbers from KPMG's corporate tax rates table. Australia has a rate, as honourable members know, of 28.5 per cent for small businesses and 30 per cent for everyone else. And the government proposes to bring the overall tax rate down to 25 per cent. A number of other countries have tax rates between 25 and 30 per cent, among them New Zealand, at 28 per cent; Canada, at 26.5 per cent; and Germany, at 29.72 per cent. The fact is that having a company tax rate well above 25 per cent has not stopped countries, like the United States and Germany, from growing strongly.

There is one more little secret that those advocating a company tax cut do not let you in on, and that is dividend imputation, an unusual system in Australia shared in the OECD only by New Zealand. What does dividend imputation do? It gives back a share of the company tax revenue to individual taxpayers. According to Geoffrey Kingston's 2015 analysis in JASSA:The Finsia Journal of Applied Finance, a rough rule of thumb is that dividend imputation gives back a third of company tax revenue. So, in terms of what the government raises, a 30 per cent rate with imputation raises about as much as a 20 per cent rate without imputation. If you hear anyone do international corporate tax comparisons and not mention imputation, you know they are being deeply disingenuous. So Australia's 30 per cent rate raises what Britain's rate of 20 per cent without imputation raises. Those facts are simply ignored by those opposite.

The Treasurer, extraordinarily, in question time yesterday was arguing that I should be supporting a corporate tax cut because my co-author Richard Holden supports a corporate tax cut. The Treasurer seems to have a very unusual notion of how economists work. He thinks that once you have written an article someone you must be in mind meld with them. Every future position they take, you have to take. Clearly, that is the way things work over on the government benches. They are in mind meld about everything, aren't they? Apart from maybe Cory Bernardi, or George Christensen, or the next break-out. The fact is that you can write papers with people and then disagree with them afterwards. The member for Dawson seems to be straying off the reservation. We will see whether or not he is able actually to put his vote where his mouth is next time the vote on a banking royal commission comes to this House. He could not quite manage it on the last sitting day of last year, but let's hope, for the sake of the electors of Dawson, that he is able to do it next time around.

The fact is that powerhouse economies around the world have corporate tax rates comparable with Australia's, ignoring imputation. Take into account imputation, compare us with countries that have rates a third lower, and Australia's corporate tax rate raises approximately what is raised by even the countries with the lowest corporate tax rates in the OECD.

Then we come to the government's argument that a corporate tax cut will boost growth. In order to knock down this argument you have to go no further than the government's own analysis, a paper released on budget night titled Analysis of the longterm effects of a company tax cut. You have to work through this paper fairly carefully in order to work out exactly what the government's argument is. First of all, let's start with the fact that domestic shareholders barely benefit from corporate tax cuts. As the Grattan Institute's John Daley has pointed out, local shareholders only gain if profits are reinvested rather than paid out. Our firms have pretty high payout ratios, so most of the $8 billion annual gain from a corporate tax cut will, in the first instance, go overseas.

Not only do most of the first-round benefits go overseas, but there will even be some cases in which US-based multinationals repatriate their profits, paying the difference between their higher rate and our lower one. In such cases, an Australian company tax cut simply flows into the coffers of the US Treasury, meaning some of the reduced revenue from the Australian company tax cut would be available to be spent by the successors to President Trump—I say 'successors' because we are talking a very long time into the future, and I will come back to that issue.

Having enjoyed the first-round benefits of a company tax cut, the Treasury report then argues that foreign shareholders will respond to higher after-tax profits on their Australian investments. The theory goes that overseas shareholders then invest less in other countries and more in Australia. More investment, allegedly, means greater demand for land and labour. So, in the long run, land prices and wages are supposed to rise.

Of course, as Keynes famously put it, we are all dead in the long run, so it is worth thinking about how long we are talking about. The answer, typically, is seven to 10 years. Since the coalition's tax cut only reduces the tax rate on big business to 25 per cent on 1 July 2026, this means that the coalition is promising benefits that would accrue somewhere between 2033 and 2035. At that point, Prime Minister Turnbull would be in his late 70s and well on the way to becoming the longest-serving Prime Minister since Robert Menzies. As things currently stand, I think most commentators would say he would be lucky to last out the year!

But how big will the gains be? It depends on how you pay for the company tax cut. The Treasury report suggests that tax cuts could be funded by a nationwide land tax, higher personal income taxes or lower government spending. Given that the federal government has not levied a nationwide land tax since 1952, let us set that one aside. So that means you fund it either through less spending or higher income taxes.

According to Treasury, if you do it through less spending, the boost to households is 0.7 per cent. But there is a bit of a wrinkle in that. The Treasury report notes that it is important to recall that the modelling of 'government spending is assumed not to affect directly the welfare of households'. It also notes:

While this is a common modelling assumption, it ignores the fact that: government spending provides goods and services that would otherwise not be provided by the market sector; households derive direct utility from government spending; and infrastructure spending can improve market sector productivity.

So, in other words, if you believe that everything the Commonwealth spends on schools, hospitals and roads has no impact on the welfare of households, then you can believe that the benefit of a company tax cut funded by less government spending is as big as 0.7 per cent. If you do not, then it is smaller than 0.7 per cent.

We should also be wary of a government that claims that it is going to fund a company tax cut out of lower government spending, given that government spending, as a share of the economy, has gone up, not down, under the Abbott-Turnbull government. So, most likely, a company tax cut for big business would be funded by higher personal income taxes—in other words, taxes down on big business; taxes up on individual taxpayers. If you do it that way, the government's own modelling suggests that the benefit to households is 0.1 per cent—not annualised; total.

So how big is a gain in household incomes of 0.1 per cent? If you look at data going back to the early 1970s, you can roughly work out how rapidly household income has grown over that period. It turns out that it has risen by about 0.1 per cent per month. So in exchange for copping higher personal income taxes and a lower corporate tax rate, the government reckons that the most likely scenario is that households would get an extra month of household income growth. That is what the government's own modelling claims the benefit is.

This is at a time when wage growth is at a 30-year low, living standards are below where they were in 2013, inequality is at a 75-year high, the homeownership rate is at a 60-year low and the top one per cent have doubled their share of national income over the past generation. Yet the only economic plan that the government has is a plan which, according to the most likely estimate from their preferred modelling, delivers 0.1 per cent extra income to households in the mid-2030s. No wonder, when you look to independent commentators, they panned it. Ross Gittins says:

If you wanted to create jobs, cutting the tax on foreign investors isn't the way to do it.

Bernard Keane says:

It could be the greatest tax avoidance scam ever perpetrated …

If you want to do something to help business grow, then it makes more sense to invest in trained workers. Make sure that you have proper investment in infrastructure based on cost-benefit analysis and not on National Party pork-barrelling, that you have predictable politics, not the chopping and changing that we have seen from this government, a government led by a man who said he would never lead a party not as committed to climate change as he is but who now backs off from an emissions intensity scheme, even though his own Chief Scientist says it would decrease power prices and tackle emissions.

Labor supports a strong business sector, but we do not believe in quick sugar hits. The government has put in place a $20,000 instant asset write-off—not one like Labor's, which was ongoing, but one which cuts off at midnight on 30 June this year. That is no way to build long-term business growth in this country.

 


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