The government says it abandoned a possible GST increase because modelling showed little, if any, economic benefit from the associated personal income tax cuts. But the champions for reducing revenue have moved on — it is a lower company tax cut that is now supposedly “essential” to stimulate growth.
The assertion that cutting the corporate tax rate is a good idea has become so common in Australian debate that it is rarely questioned, with claimed benefits including higher investment, higher employment, higher growth, higher productivity … higher everything.
The political benefits for such a tax cut are sometimes questioned, as is the best way to fund another big hit to revenue. Much time is spent debating whether it would be better to increase the GST, cut tax concessions for super or slash government spending. But all the talk about how best to cut the corporate tax cut has been used to conceal a much more important question: where is the evidence that cutting the corporate tax rate is a good idea?
In fact, international and Australian data on tax rates and macroeconomic indicators provides no support. A new report out today from David Richardson, senior research fellow at The Australia Institute, analyses data from Australia and OECD countries and finds that:
- There is no correlation between corporate tax rates and economic growth in OECD countries;
- Countries with lower company tax rates have lower standards of living, measured as purchasing power of GDP per capita;
- Wages and mixed income has declined as a share of GDP as corporate taxes have been lowered;
- Average unemployment rates have risen as company tax rates have lowered; and
- Growth in foreign investment as a share of GDP was strongest when Australia’s company taxes were highest.
Then there is the revenue cost. The most common proposal is for a company tax cut from 30% to 25%. But what would that actually look like — not in projected trickle-down benefits or in the new parlance “growth dividend”, but what would it mean in dollars and cents for the budget and for Australian companies? Many of the same commentators who were once obsessed with the need to rein in the budget deficit seem entirely relaxed about the consequences of slashing revenue.
The Commonwealth Bank of Australia is Australia’s most profitable listed company. If there were to be a company tax cut then it would be its biggest beneficiary. Previous research shows CBA would benefit by more than $600 million in 2016-17 and well over $9 billion over a decade if the company tax rate were cut to 25%. The big four banks would collectively receive a gift of more than $2 billion in year one and almost $30 billion over 10 years.
The argument goes that this increased post-tax profit will drive massive new investment levels. However, a cut in the corporate tax rate would be unlikely to increase the already low levels of investment in the Australian banking sector. If anything, banks have been getting rid of property and buildings and only investing in technology when it means they can save on labour costs. The Commonwealth Bank is moving back to the city from the Sydney suburbs because it cannot attract and retain staff in western Sydney. Any investment associated with that would have happened anyway.
The mining companies will also be big beneficiaries — but with commodity prices the way they are, the miners are not likely to be investing much for some time. Indeed, the financial press is full of stories of mines being closed and many of the others facing losses. No amount of company tax cuts can assist a company making losses, but we should know that from watching the repeal of the mining tax. Unsurprisingly, the removal of the mining tax did nothing to fend off the collapse in commodity prices.
While the benefits of cutting the company tax rate are hard to identify and even harder to measure, the costs will be huge. The $58 billion the top 15 listed companies would receive from a 5% cut over the next decade comes out of a budget that already has a revenue problem.
You would think that such an expensive decision would be based on a wide range of reliable evidence, but a notable feature of the current debate is the complete lack of strong empirical evidence. Instead we get modelling exercises where someone plugs in an assumption that tax cuts will stimulate investment, and lo and behold the model shows there are benefits from cutting taxes. Such exercises are not much help.
The “mature” tax debate we’ve long been promised, so rarely seen in Australian politics, must be grounded in evidence. Australia is a good place to invest and do business — the proof is in the pudding, with companies making high profits and most of the time paying taxes.
And this is the compact: pay your taxes and Australia can afford to keep on providing health services, a well-educated workforce and important infrastructure. While high-profit companies might enjoy paying less tax, let’s not pretend that doing them such a kindness is a cure-all for the Australian economy.
The economic case for company tax cuts is poor. The tens of billions that some want to give to the owners of our biggest companies could be invested instead in improving education, childcare or infrastructure. The economic evidence supporting such investments is strong, but not nearly as strong as the support for corporate tax cuts among sections of the commentariat.