Last week the odds of the Senate passing the Turnbull government’s company tax cut dramatically shortened with One Nation coming on board. It is timely, then, to reflect on what it will mean not only for our economy but for the fabric of our society.
Economic theory tells us that what matters is not the initial impact of a tax but who ultimately ends up paying it. The theoretical argument goes that foreign investors would note a rise in the after-tax return on investment from the company tax rate cut, and increase their investment in Australia by installing sophisticated new plant and equipment. Working with this new gear would make Australian workers more productive, causing their wages to rise. That’s why the government claims the big winners from a company tax rate cut are Aussie workers.
Even if this theory holds true, the government’s preferred economic modeller, Chris Murphy, estimates that the gain to Australians from cutting the company tax rate from 30 per cent to 25 per cent is a one-off $200 each in around 2035.
Murphy assumes that if the company tax rate is reduced, multinational corporations in Australia will cut back on the practice of profit shifting to tax havens – a sort of morality dividend. That is, multinationals would continue to shift profits to the Cayman Islands at a 30 per cent rate but would ease back on doing so at 25 per cent.
The small gains estimated by Murphy rely on what he concedes is an unrealistic assumption; that the company tax rate cut is financed by a lump-sum tax on every person in Australia – pure political poison. He considers the more realistic situation of financing the company tax rate cut through bracket creep on ordinary wage and salary earners.
Using bracket creep to finance the company tax rate cut Murphy’s estimated gain to Australians is reduced to just $150 each around the mid-2030s, and, wait for it, results in a small loss of employment.
Murphy estimates the optimal company tax rate following the recent US tax changes, “is no higher than 20 per cent” and “there is some case for reducing the corporate rate further, from 20 to 15 per cent.” Indeed, Murphy cites the theoretical literature as concluding “a small open economy should ... not attempt to tax capital, regardless of the tax policies in other countries.”
Can you see where this is all heading? The modelling upon which the government has relied in making its case for cutting the company tax rate says it should be cut much further, from 25 per cent to 20 per cent to 15 per cent, and ultimately eliminated.
Murphy proposes financing these company tax cuts by a new tax on resource rents and oligopoly rents, but we know the Business Council of Australia is stridently opposed to a resource rent tax and its member banks would not see the funny side of a big new tax on them either.
The Opposition’s Investment Guarantee would target investment directly and would cost much less since, unlike the proposed company tax rate cut, it would not confer a large windfall gain to multinationals on income from investments they have already made at the 30 per cent rate. When the revenue loss from the windfall gain to multinationals from cutting the company tax rate is taken into account, Murphy’s estimated tiny gain to Aussie incomes become a loss.
It would make more sense to proceed with the Investment Guarantee, which would come into effect well before the proposed company tax rate cut was fully implemented, and review the global company tax rate situation in a few years’ time. By then, the US Congress will be considering ways to fill the huge $1.5 trillion hole punched into the budget by the Trump tax cuts on top of the existing yawning deficit. Indeed, this might include putting the company tax rate back up again, especially if the Democrats were in charge.
But now that the US company tax rate has been cut to 21 per cent, the business community will inevitably lobby to cut the Australian rate further from 25 per cent to 21 per cent, while stridently opposing a rent tax to replace it.
In this society, present and future generations of ordinary Australians will be called upon to foot the bill for this and further reductions in the company tax rate, through a combination of higher personal taxes, an increase in the GST rate and reduced income support for the poor. Inequality will worsen, resentment against large corporates will escalate and we will become an even more divided society. Is that what we really want for our country?