HOUSE OF REPRESENTATIVES
11 SEPTEMBER 2017
Today, I want to deal with three arguments that the coalition have made for cutting the company tax rate. They've claimed that Labor once supported cuts to the company tax, they've claimed that other countries have lower corporate tax rates and that ours are comparatively high and they've claimed that cutting the company tax rate for big business will boost growth. I will explain to the House, in turn, the problems with each of these arguments.
First, the coalition claim that Labor in the past supported lower 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 the Liberal and National parties of the day, Paul Keating brought in reforms like capital gains tax, fringe benefits taxation and an assets test on the pension. He made hard decisions to ensure that our tax base was broader and our social safety net better targeted, 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. We said at the time we'd support a modest reduction in corporate tax in return for broadening the base.
What has changed since then? Unfortunately, a lot has changed. In 2013, net government debt in Australia was $184 billion. Now net government debt is $325 billion, in 2016-17, as reported in the last budget. In the 2013 Pre-election Economic and Fiscal Outlook, the estimate for 2016-17 debt was $217 billion. That is a full $108 billion lower than the actual figure came in at. Net debt will have increased by $141 billion since the coalition came to office, which equates to $5,700 for every man, woman and child in Australia. When we debated for the first time the coalition's tax plan, everyone listening to the debate was told that the Liberals had increased government debt per person by $4,500. But now, if you need an answer to the question: 'Why is now a bad time to cut the corporate tax rate?' the simple answer is: $5,700 of Liberal-National debt.
In the notorious 2014 budget, the projected deficit for 2017-18 was about $3 billion. It has now increased to $29 billion, nearly 10 times worse than forecast just a few years ago. A party that used to hold press conferences in front of debt trucks, ought by rights to be driving debt road trains for what they've done to debt. They used to talk about debt and deficit disasters and used firefighting metaphors, but you don't hear much now from the coalition about debt, and that's for one simple reason: their $65 billion corporate tax cut. Frankly, they have taken the Reaganite approach. As Ronald Reagan in the 1980s ramped up debt, cut taxes and left the problem to someone else, so too the coalition are now hoping to kick the debt can down the road, increasing debt but failing to make the hard decisions, as Labor has done.
Under the leadership of the Leader of the Opposition and the shadow Treasurer, Labor has made tough decisions around negative gearing, around trusts and around deductions for managing tax affairs. We recognise that it is only through proper base-broadening that you earn the right to have conversations about expenditure or about lower rates. The coalition have not earned that right, because the coalition have been unable and unwilling to make tough decisions on fiscal policy in Australia.
I want to turn to the comparative position of Australia's corporate tax rate. Australia has a rate, as honourable members know, of 27.5 per cent for small and medium businesses up to $10 million and 30 per cent for other businesses. The government's proposal is to bring the overall tax rate down to 25 per cent for all companies. A phase down to 25 per cent is already legislated over the next decade for companies up to $50 million in turnover. Their argument, the argument they so often make, is that we have to do this because Australia's corporate tax rate ranks us unusually high. Well, let's have a look at a careful analysis of that. The US Congressional Budget Office, a non-partisan budget outfit, published its international comparisons of corporate income tax rates in March 2017. It contains summary table 1 on page 2, which ranks G20 corporate tax rates from highest to lowest on three metrics: the statutory corporate tax rate, the average corporate tax rate and the effective corporate tax rate. On the statutory corporate tax rate, Australia's 30 per cent rate ranks as 10th. On the average corporate tax rate, Australia's rate ranks us 15th, the fourth-lowest in the G20. On the effective corporate tax rate, we're ranked 11th. So we are average or below average for our corporate tax rate compared with the G20, which is surely the relevant comparison. The G20 are the world's 20 largest economies. If we want to do an apples-to-apples comparison, let's not sit there cherry-picking comparisons with countries that have no social safety net to speak of. Let's not do comparisons with countries whose residents are pushing hard to move to Australia and to which very few Australians would like to move. Let's do comparisons with the world's 20 biggest economies. When you do that, you get the answer that our corporate tax rate is at or below average compared to the G20.
But there is another little secret that those advocating a corporate tax cut don't often let you in on and that's dividend imputation. It is a system that gives back a share of the corporate tax revenue to individual taxpayers. A rough rule of thumb, according to Geoffrey Kingston's 2015 analysis, and JASSA: The Finsia Journal of Applied Finance, is that dividend imputation gives back a third of corporate tax revenue. So in terms of what the government raises through corporate taxation, a 30 per cent rate with imputation raises about as much as a 20 per cent rate without imputation. If you hear anyone doing international corporate tax comparisons and they don't mention imputation, you know they're being deeply disingenuous. You hear people say that Britain has a 20 per cent rate or Donald Trump would like a 20 per cent rate for the United States, but just remember that Australia's 30 per cent rate with dividend imputation already today raises about as much as a 20 per cent rate without imputation. If you ignore that, you are either deliberately obfuscating the debate or ignorant of one of the central facts in this debate. The very fact is that powerhouse economies around the world have corporate tax rates comparable to Australia's ignoring imputation. Take into account imputation and Australia's corporate rate is, if anything, significantly lower than the relevant comparator companies.
Then we turn to the government's argument that a corporate tax cut will boost growth. One way of knocking down that argument is to simply go to the government's own analysis, a paper released on budget night last year entitled Analysis of the long term effects of a company tax cut. You need to work carefully through this paper to see what the government's argument is. Firstly, domestic shareholders barely benefit from corporate tax cuts. As the Grattan Institute's John Daley pointed out, local shareholders only gain if profits are reinvested rather than paid out. Given the surprisingly high pay out ratios among Australia's listed companies, most of the $8 billion annual gain from a corporate tax cut will go overseas in the first instance. Indeed, there'll be cases in which US based multinationals repatriate their profits, paying the difference between their higher rate and our lower one, which will mean that an Australian corporate tax cut will just go into the coffers of the US Treasury and be spent by the successors to President Trump—because, of course, we're talking about impacts a fair way down the line.
Let's go on with the argument in the government's own analysis. The Treasury report argues that, having enjoyed the first-round benefits of a company tax cut, 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, which means greater demand for land and labour, so in the long run land prices and wages are supposed to rise. But this long run is pretty long. Given that we're typically talking about seven to 10 years after the change comes to fruition, and since the coalition's tax cut only reduces the tax rate on big business to 25 per cent on 1 July 2026, this means we're talking about benefits somewhere between 2033 and 2035. At that stage, Prime Minister Turnbull would be in his late 70s and the longest-serving Prime Minister since Menzies.
But how big will those gains be? The Treasury report says that corporate tax cuts could be funded by a nationwide land tax, which is pretty unlikely given that the federal government hasn't had one of those since 1952, or lower government spending, which is pretty unlikely given that the government has failed to implement its promises on government spending. The most likely scenario is that a company tax cut for big business would be funded by higher personal income taxes. In other words, we'd cut the taxes on big business and increase the taxes on individual taxpayers—just as, for example, we're seeing with the coalition's attempt at the moment to raise the Medicare levy on anyone earning over $21,000. It's well along a path which would see it fund a corporate rate cut through an individual rate rise.
On that assumption, the government's modelling suggests the benefit to households is 0.1 per cent. How big is 0.1 per cent? It's roughly the rate of household income growth per month since the early 1970s. So the government is promising an extra month's worth of household income growth, in the 2030s, in exchange for higher personal income taxes. Put that way, it doesn't sound like that much of a deal. Particularly with wage growth at a 30-year low, inequality at a 75-year high and home ownership at a 60-year low, 0.1 per cent to households in the mid-2030s isn't much to write home about.
As 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 …
A recent study written up in The New York Times by Sarah Anderson of the Institute for Policy Studies takes another approach. She and her co-authors consider the argument that a lower corporate rate creates jobs by looking at the 92 publicly held American corporations that reported a profit every year in the US from 2008 to 2015 but paid less than 20 per cent of their earnings in federal income tax. They looked at the job creation rate in those companies. Do US companies that pay a low corporate rate create more jobs? After all, we get told every day that a lower corporate rate will be a job creator. But they found exactly the opposite. They found that those companies had a median job growth rate over the past nine years of negative one per cent, compared to six per cent for the private sector as a whole. Of those 92 companies, they found that 48 got rid of a combined total of 483,000 jobs. Of course, the news wasn't all bad in those firms. If you were a chief executive in those firms, your pay averaged nearly $15 million, compared to the $13 million average for S&P 500 companies. So, right now in the US, companies that pay less corporate income tax create fewer jobs but pay more to their CEOs.
If that's the kind of race to the bottom that the coalition have in mind, it's short shrift for Australian workers. Australian workers won't see more jobs as a result of this big business tax cut. Instead, they'll see more debt and higher taxes. If you want to see business grow, you need to invest in trained workers, move away from National Party pork-barrelling in infrastructure and put in place clean energy policies that are market driven rather than continually attacking renewables. You need an instant asset write-off that doesn't have a sudden-death expiration but continues providing stability for businesses looking to invest.
We also have the extraordinary spectacle of the coalition wasting millions of dollars trying to buy credibility for its multinational tax reforms. At the very time when we have a $340 million judgement against Chevron, the coalition are patting themselves on the back. Yet, in 2012, they voted against the very same laws that secured that judgement. If they had any honesty, they'd be apologising to the Australian people for voting against Labor's laws to close multinational tax loopholes, not patting themselves on the back. The coalition needs to commit to tightening debt-deduction loopholes used by multinational companies, which would improve the budget by nearly $5 billion over the decade. We need greater transparency. We need better treatment of multiple-entry consolidated groups. We need to close tax loopholes.