Not surprisingly, in spruiking the benefits of corporate tax cuts, the government has gone easy on the fact that it would mean a windfall would flow to companies and foreign shareholders in favouring of suggesting that it’s workers who would be the real beneficiaries. “At least 50% of the impact of cutting company taxes goes in higher wages for workers and higher employment,” cabinet secretary Arthur Sinodinos said on the weekend as he paved the way for the government’s “tax reform” mini-package to focus on handing out tax cuts to companies. As they say in advertising, it might be Christmas for companies, but you get the presents.
Bear in mind that the government has already, via repealing the carbon price and the mining tax and reducing tax for small business, handed billions in tax cuts to the business sector since 2013. But conscious of the bad look of handing out lots of dollars in tax cuts to companies, the government is pushing the line that company tax cuts boost jobs, wages and economic growth.
Sinodinos hasn’t just plucked the argument about lower company tax being good for workers out of the blue. In fact it’s a pretty shopworn argument from the right and advocates for lower company taxes (i.e. companies and the dodgy think tanks they fund). Indeed, the idea has been called “the great incidence hoax”. It’s simply not demonstrably true — there is no evidence from anywhere in the world that the incidence of corporate tax primarily falls on workers. In fact, according to a study by the US Congressional Budget Office, 75% of the burden of corporate tax falls on capital, not workers. At the very least, according to a study by prominent US economics professor, “there is simply no clear and persuasive evidence of a link between corporate taxation and wages.”
That’s consistent with the claim that cutting corporate tax rates is good for economic growth — there’s little evidence for even a marginal increase in economic growth from corporate tax cuts either.
If you look at the UK, where company tax cuts have been a centrepiece of the Cameron government’s tax policies, the evidence is mixed as well. Company tax was cut in the UK from 28% in 2010 to 20% by 2015. From the start of 2010, quarterly GDP grew by a total of 12.6% to the fourth quarter of 2015 (400 billion pounds to 450.5 billion pounds). In the same period, the Australian economy grew by nearly 17% (from quarterly GDP of $356.6 billion in the March quarter of 2010 to $415.2 billion in the fourth quarter of last year). Indeed, UK GDP only exceeded its pre-GFC level in the second quarter of 2013 (GDP there fell 6.1% from the first quarter of 2008 to the second quarter of 2009). Australian GDP never fell below its pre-GFC level.
UK Chancellor George Osborne — who is in the middle of a major revolt by backbenchers after another cabinet minister, Iain Duncan Smith, resigned rather than support cuts to disability payments in Osborne’s latest budget — intends to further lower the main rate of corporate tax in the UK to 17% by 2020 from its current 20%, which would make the British rate the lowest in the G20. But Osborne also announced plans to change tax laws, the effect of which will be to claw back an extra 12 billion pounds of tax revenue by 2020 — a sort of give with one hand, take with the other.
And despite Britain’s lower company tax rate, Britain’s Office for Budget Responsibility recently cut its forecast for growth over the next four years: it expects the UK economy to grow 2% this year and 2.2% in 2017, compared with a previous forecast of 2.4% and 2.5%, respectively. That’s well below Australia’s current projected rates of growth, even after Treasury’s downgrading in last year’s MYEFO.
The British economy certainly grew from 2010, but growth peaked in 2014 at 2.9% (Australian growth was just over 2% that year), then slowed to 2.2% last year — the year Osborne had originally claimed his budget would be back in surplus, but it’s still deep in the red. Australian growth jumped to 3% last year. Osborne has done better on unemployment — the UK jobless rate is at a 10-year low of 5.1% while Australia’s currently 5.8%. But, despite the claim from Sinodinos that company tax cuts could “encourage” productivity, UK productivity growth has also slowed sharply in recent years while Australian productivity has been solid for three years now — indeed labour productivity in the UK actually went backwards in 2012-13.
What about wages? Surely if, according to all the experts, lower company taxes lead to higher wages, the Brits would have enjoyed faster wages growth than Australians in recent years — especially since for the last two to three years Australians have “enjoyed” some of the slowest wages growth on record? Alas, according to data from the UK Office of National Statistics, average weekly earnings have increased there by 12% since 2010, compared to 17% here. Even if you accept it would take time for benefits to flow through to workers, wages have increased by just under 9% since May 2012 here, compared to 6.2% in the UK. If anything, company tax cuts coincided with wages growth even slower than the record low growth Australians have seen.
This is the thing about company tax cuts. Advocates are quick to promise the world about them — they’re a kind of economic wonder drug that will lift wages and employment and productivity and economic growth and investment. But try to find any evidence in the real world for any of it, and you come up empty-handed.