Andrew Leigh

Do Lower Company Tax Rates Create Jobs?

inequality.org, 4 April 2018

As Australia’s conservative government tried to legislate a cut in the company tax rate for large firms, the Business Council of Australia stepped up to help. Attempting to persuade minor party representatives in the Senate, the lobby group circulated a letter signed by ten CEOs. They pledged that if the corporate tax rate was cut, then they would ‘commit to invest more in Australia which will lead to employing more Australians and therefore stronger wage growth as the tax cut takes effect’.

Unfortunately for the Business Council of Australia, someone in their organisation then leaked the first draft. In the original version of the letter, CEOs would have pledged to create more jobs, to avoid the offshoring of jobs, to increase wages, and to pay their taxes. But they baulked, and the Business Council ended up putting a red line through these stronger promises.

To make matters worse, it was also revealed that the Business Council of Australia had conducted a confidential survey of its CEOs. Asked what they would do with the money from a corporate rate cut, only one in six corporate bosses said they would spend it on employment or wages. Upon seeing the results, the Council decided not to release them to the public. Again, they were leaked.

Like the United States, Australia has been debating cutting corporate tax rates, with the conservative government of Malcolm Turnbull announcing in 2016 that it would attempt to lower the corporate tax rate for large firms from 30 percent to 25 percent. The cut has passed the House, but the government does not yet have the numbers in the Senate.

One of the chief arguments that the government makes for a lower corporate tax rate is that it would spur job creation. As a Labor Party member of the Australian Parliament and a former research economist, I was curious to test the claim that companies which pay less tax create more jobs. Looking across large US firms, Sarah Anderson and Sam Pizzigati’s analysis for the Institute for Policy Studies found no evidence that companies which paid a lower effective rate of tax generated higher levels of employment. If anything, the relationship was the opposite – the low-tax firms generated fewer jobs (though they did pay their executives more).

Using data for about 1000 profitable Australian firms, I compared effective tax rates with the pace of job creation at each company. My research – published in the journal Economic Analysis and Policy – found that the same pattern held in Australia as in the United States. A lower effective rate of tax was associated with a lower rate of job creation.

Indeed, the magnitudes are strikingly similar across the two studies. In both countries, firms with an effective tax rate below 20 percent shed jobs at a rate of 0.1 percent annually. This suggests that if the entire economy was made up of such firms, the jobless rate would be skyrocketing. By contrast, Australian firms with an effective tax rate above 20 percent grew employment at an annual rate of 2.0 percent, while average US private sector job growth for the period in question was around 0.8 percent.

Looking at effective tax rates isn’t a perfect way of assessing the impact of company tax cuts on employment, since they are driven by the deductions and rebates that a corporation claims, rather than changes in the policy rate. But the results are robust to holding constant a firm’s revenue, or to comparing within industries.

Indeed, even the strongest proponents of corporate tax reductions don’t produce particularly impressive figures. Modelling commissioned by the Australian Government to support its proposed corporate rate cut estimated that company tax cut that was funded by higher personal income taxes on middle Australia would boost household income by just 0.1 percent. This is about one month’s household income growth, and would not flow until the 2030s.

Despite what the government claims, Australia’s corporate rate is about average among comparable nations. The US Congressional Budget Office found last year that Australia’s statutory corporate tax rate ranks as 10^th-highest in the G20. And there’s another aspect of the Australian system that doesn’t exist in most nations: shareholders receive a tax credit on their personal tax returns for the tax paid on their dividends.

Perhaps the biggest risk to inequality from a corporate tax cut is that it would blow out government debt – creating an excuse for conservatives to cut social spending. Australia’s social safety net is the most targeted in the world. So cuts to social supports fall heavily on the most vulnerable in our community.

In the 1980s, Ronald Reagan pursued a ‘starve the beast’ strategy: cutting taxes in order to generate the political momentum for reductions in government spending programs. President Reagan recognised that spending programs were politically popular, so the only way to undermine them was by increasing debt, and creating a false crisis that could only be solved by savage reductions in spending programs.

Those of us who care about inequality need to recognise the risk of such a strategy again rearing its ugly head. Unless conservatives can say how they plan to pay for corporate rate cuts, it’s safe to assume that their unspoken plan is to fund them by cutting spending on health, education and the social safety net. That’s not a strategy for jobs, for growth, or for equity.

Andrew Leigh is a member of the Australian House of Representatives, and a former professor at the Australian National University. His website is www.andrewleigh.com.    

This opinion piece was first published by inequality.org on Wednesday, 4 April 2018.

Authorised by Noah Carroll ALP Canberra.