The battle over company tax cuts is hotting up and the response by the government and the business sector to analysis by ABC’s Emma Alberici – on the impact of such tax cuts and evidence that one in five of the largest corporations in Australia paid no tax over the past three years – shows how worried they are that they are losing the fight.
On the same day Alberici’s article was published, the prime minister referred to it during question time as “one of the most confused and poorly researched articles I’ve seen on this topic on the ABC’s website”. Meanwhile, the Qantas chief executive, Alan Joyce, argued in the Australian that there were good reasons why the airline hadn’t paid tax in the past and that whether it did or not was irrelevant when it came to the issue of arguing for a lower tax rate.
On Friday, the ABC took down Alberici’s analysis, citing that it did not conform to the broadcaster’s editorial standards. Frankly, the article – which has been republished on John Menadue’s blog, is not all that different in focus from analyses by Ian Verrender published by the ABC last year, The Age’s Peter Martin and various others, including myself.
Arguing that company tax cuts may not have the impact that the beneficiaries say will result is hardly controversial.
As I noted in January, Moody’s credit rating agency said of the US company tax rate cut from 35% to 21% (compared with a reduction from 30% to 25% proposed here) that “we do not expect corporate tax cuts to lead to a meaningful boost in business investment”.
But given most people don’t get excited by business investment (or increased business profits), companies here have followed the lead of their US counterparts, and are saying a tax cut is needed to increase wages.
It’s all a bit of smoke and mirrors.
Company tax cuts deliver higher after-tax profits; they don’t increase sales or lower costs in the short run. Rather, the hope is that companies will make use of the tax cuts to increase investment, which in turn will lead to increased productivity, and then, in the long run, higher wages.
This is not some leftwing view – it is the Treasury department analysis the government has used to justify the need for tax cuts.
The Treasury says a tax cut will lead to increased investment, which “drives up the productivity of labour. This raises the demand for labour and results in higher before-tax real wages.”
Wages are labour costs. Increasing them because your post-tax profit is higher is a bit like you getting an income-tax cut and telling your landlord you’re able to pay more rent. Sure, you might make use of an income-tax cut to move to a better house and then pay more rent there but that is essentially you choosing to invest – much as the government hopes companies will do.
Here as well, the evidence from the US is not very helpful. American companies have overwhelmingly used the tax cut to buy back shares (as Moody’s argued) and wage increases have mostly been given in the form of one-off bonuses rather than an actual pay rise.
The reason is obvious – a bonus is not a continuing cost, and it makes for good PR. Since the tax cut, about $5.6bn has gone towards employee bonuses, while $171bn has been spent on share buybacks.
The conservative thinktank, American for Tax Reform, estimates that about 3.8 million American employees have been awarded bonuses, which sounds great until you realise there are 147.4 million employees in the US, so it means this covers about 2.5% of all workers, and is less than the 4.5 million workers who in January benefitted from an increase in the minimum wage in 18 states.
Alberici’s article also pondered: “Can Australia afford to spend $65bn?” – which is the total cost of the tax cuts going out to 2027-28 when the final cuts are made.
Rather than being a question of controversy, this was an issue the governor of the Reserve Bank, Philip Lowe, raised on Friday when he appeared before the House Economics committee.
In the hearing, Lowe was very cautious about spruiking the government’s line that the tax cut would lead to an investment boost.
He said the benefit of the tax cuts very much depended on how they were funded. He described the Trump cuts as “very problematic” because they were unfunded and would increase the size of the deficit. Lowe suggested that “if we were to go down the direction of having lower corporate tax rates, I think it would be a big mistake to do that on the back of higher budget deficits.”
He said that if the company tax cuts were funded based on bigger deficits, “animal spirits could turn the wrong way”, especially if at some point the economy did slow down and stimulus was required.
He also noted that the choice was essentially one of a cut in tax or government services. Tax cuts don’t pay for themselves – even Scott Morrison concedes the government will get back, through increased economic activity, only 37 cents in every dollar lost from the cut in company tax rates.
So either something else needs to be taxed more or government spending needs to be cut.
This isn’t controversial, it’s obvious.