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Economy

Dec 4, 2017

Company tax cuts won’t work in the US, and they won’t work here

Optimistic tax models put the average Australian at being 0.1% better off under the proposed company tax cuts. And the good news is they'll only have to wait 25 years for that tiny benefit to appear! Economist John Quiggin reports.

John Quiggin

Economist

It now appears certain that the Republican majority in the US Congress will pass a massively regressive package of tax cuts, with a cut in the rate of company tax as its central feature. Unsurprisingly, this news has produced a revival of the Turnbull government’s proposal to offer similar cuts here.

19 comments

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19 thoughts on “Company tax cuts won’t work in the US, and they won’t work here

  1. Vince Black

    Beware Greeks Bearing Gifts
    In my opinion Malcolm Turnbull’s proposed enterprise tax reduction plan has the potential to be Australia’s Trojan horse.
    Students of history will know the story of how the ancient city of Troy was well protected by a high surrounding wall which, for a period of ten years, provided an effective defence barrier that an attacking Greek army was unable to penetrate.
    However the Greek general Odysseus developed a clever plan of deception which involved the building of a giant wooden horse, to be placed outside the main gate of the wall to the city.
    After the horse was built the entire Greek army pretended to sail away from the city of Troy, giving the appearance that they had finally admitted defeat.
    Soon after, the jubilant citizens of Troy emerged from the city and found the Trojan’s wooden horse. In their excitement they dragged their seemingly harmless trophy inside the city gates and put it on display – which is just what the Greek general thought they might do.
    However, unbeknown to the people of Troy, the hollow wooden horse contained thirty Greek soldiers hiding inside.
    That night, when the people of Troy were sleeping blissfully after wild celebrations, the Spartan soldiers emerged from the horse, and opened the city gates to allow the waiting Greek army to enter and destroy the city of Troy and annihilate its citizens.
    The moral of this story is that there are occasions when something that on the surface might appear benign, in fact has the potential to be dangerously harmful.
    I’m suggesting the moral warning in the fable of the Trojan horse applies to Malcolm Turnbull’s proposed enterprise tax reduction plan.
    If Malcolm Turnbull’s Coalition government is returned it will legislate to give Australian ‘small’ businesses tax cuts of 20%. That’s something I personally don’t have much of a problem with. However, like the soldiers in the wooden horse, the deceptive element of this policy is that the legislation will change the definition of a ‘small’ business to increasingly morph over the next ten years, until we reach the ridiculous situation where the big four banks, Telstra and BHP as well as large multi-nationals will all qualify for 20% tax cuts!
    The cost to the Federal budget in 2026 alone is expected to escalate to an amount in excess of thirteen billion dollars! AND by 2019–20 it is projected to reach 15 billion dollars and keep rising.
    From another perspective, the tax cuts to large corporations over the decade to 2026 will amount to some 50 billion dollars!
    If legislated, Malcolm Turnbull’s Trojan horse suite of ‘small business’ tax cuts will slash a huge swathe of revenue from future Australian budgets and thereby ensure that our children and grand-children will be consigned to significantly lower standards of living than our generation has enjoyed.

    1. Karen

      Well said. Like you, I don’t have a problem with tax cuts to small businesses and wage earners. However, this tax cut, like most company tax cut is a form of theft from the people by the government to pay the minority rich. And yet the rest of us who pay the taxes don’t get the services we need. On the contrary, the polity is faced with cuts to services. The question is why do people keep buying that old chestnut that if you give a tax cut to rich people that will translate to jobs to ordinary folk when this has been debunked by empirical data the world over. Its a lie. The polity should wake up and simply turf governments who steal money in this way.

  2. bref

    As usual its all the way with the USA. Whether its the drug laws that don’t work and fill our jails, or the USA-like shambolic NBN rollout, or as now, the utterly discredited trickle down economics, corporate tax cuts. Surely our politicians owe us more than policies we know won’t work.

  3. klewso

    Who pays the fiddle calls the tune – in this government’s case it’s big business (they’ve got piles – of the readies and dodges).
    Cut revenue : cut services – where will this mob start? Down the bottom, as usual?

  4. billy campoven

    Yeah, what type of business leader advocates for such a pathetic tax cut and to companies only? Tax cuts across the board for companies AND individuals is The way to go. Like 10% flat rate on gross, no deductions, wth adjustment at the bottom end and a lifting of the tax free threshold for low income earners. Fund the cuts with a massive reduction in government service provision. Then watch the economy grow and employment rare rise.

  5. kyle Hargraves

    Overall, an excellent article! Perhaps a tad more could be added.
    If one were to cast an eye over the NZ Treasury Paper (Dec/04) “Average Marginal Income Tax Rates for New Zealand, 1907-2009” it would be apparent that from 1927 (to take a point but one could just as well include 1918 – i.e the end of WWI) to the year 2000 (and this year is flexible for the sake of the discussion too) it is apparent that circa 1920 personal tax (PAYE) and company tax were 20% and 50% with sales, land tax, estate duties etc comprising the remainder.

    Nowadays the situation is in reverse; almost to the percentage in question except that company tax in NZ is closer to 10% than it is to 20%. The situation is representative in Australia : see https://archive.treasury.gov.au/documents/1156/HTML/docshell.asp?URL=01_Brief_History.asp

    Now, lets consider some assumptions concerning Supply-Side Economics and the historical effects
    Privatisation.
    Some success here and there but by no means uniform. The selling the postal services and railways in New Zealand has been a disaster. All countries have similar stories.

    Deregulation.
    Some benefit – particularly regarding telecommunications services but not in every case. Regarding the sciences (and Economics is NOT a science) a “failure” of one observation justifies the rejection of a theory.

    Reducing Income Taxes.
    Anti-Keynesian (or neo Friedman) “beliefs”. If the policy was effective it would be a panacea for any recession. The is no trickle-down effect; the fat cats just get fatter.

    Education and training.
    One of the more realistic assumptions.

    Removing Trades Unions.
    To “fee-up” markets etc. because such an initiative should reduce everything from costs to unemployment. Unemployment has always existed (markets do not necessarily clear at any price); consider the necessity for the Factory Acts of the 1830s.

    Welfare Benefits.
    To be abolished because it is assumed that being paid about 1/4 of the average wage is a disincentive for the unemployed to take jobs.

    Reducing Import Tariffs.
    Because (it is assumed that) this effect will increase trade. The argument rejects the assertion that each market ought to be evaluated on its merits.

    Removing bureaucracy.
    which, apparently, adds to a costs of business; again a generalisation. Each case has to be examined

    Each is a generalisation and only one or two have any basis in (economic) history. What is happening, as a global phenomenon, is that the middle class is being destroyed. Compare the salary of a CEO of a largish company (listed on the ASX) with that of a tradesman or a lawyer (of five years experience) 35 years ago and compare the ratio now. The numbers are relatively easy to obtain.

    The Xmas present for the fat cats is to be a tax cut (at least in the USA). Providing a tax cut to the lower income groups has a positive effect via the multiplier but not so for the wealthy whose spending does not change, significantly, with changes in company tax. Those at $60,000 (and under) can expect to stay there for another decade at least.

    1. billy campoven

      So you believe that cutting axes across individuals and businesses, to put more of a persons own income in their own pocket won’t lead to increased spending, increased savings and investment, and increased debt servicing all of which makes stimulates economic activity. But government wastage and provision of services well beyond its remit that they provide for pork barelling is good. And what of the idea thatso much of a private income is expropriated so that that individual doesn’t have their own income to spend on services tailored to their own individual circumstance? If you are not minimising your tax you are funding the downfall of society.

      1. kyle Hargraves

        The “good” aspect of economics is that, over time, the unsupported or non-empirical theories come to be refuted. Consider Friedman’s Permanent Income Hypothesis that he dreamt-up tapping a fountain pen upon his desk. The motivation for the construction of the hypothesis was to attempt a refutation of Keynesian methods; no more and certainly no less.

        One or two of the assertions of the hypothesis are plausible, which gave it more life than it deserved, but as to how consumers ACTUALLY behave was recorded in a sociological study [Wilcox, D. Social Security Benefits, Consumption Expenditure and the Life Cycle Hypothesis Journal of Political Economy April, 1989.] Needless to say the behaviour supports Keynesian implications – and by corollary– refutes the Friedman’s PIH (or PYH – as some may prefer; “y” being the symbol for Income).

        As to the topic at hand the economic growth models of Luigi Pasinetti (or the Keynes-Kaldor-Pasinetti models as some may insist) resolved this matter almost 50 years ago. But as with such topics climate-change or cancer and cigarettes or whatever the topics seem to continue with a life if their own irrespective of the peer-reviewed research.

        As pointed out, above, (which would require about 2,500 words – and if Crikey wishes to provide the space I am only too happy to occupy it) except for one or two of the assumptions of the Supply-siders the remaining assumptions ARE at variance with history. As with the PIY the anecdotal propositions are suggestive but die rapidly under detailed (empirical) examination).

        Paraphrasing a famous quote by a notable Englishman of the 19th century “the more a man insists upon the purity of his honour the more justified is an audit of the silver upon the fellow’s departure”. That observation itself has its origin with the ancient world. However the observation is particularly germane to economics.

        Notwithstanding the amount of space given to the (quite unjustified) assertion than economics is a science (ipso facto is on the same plane as the “hard” sciences) in the first chapter of a 1st year text book the discipline is ideologically contaminated beyond redemption. (J.K.) Galbraith has been mentioned in these pages of late. Perhaps readers with a contrary view the above might begin with Galbraith.

        to some specifics :
        “So you believe that cutting axes across individuals and businesses, to put more of a persons own income in their own pocket won’t lead to increased spending, increased savings and investment, and increased debt servicing all of which makes stimulates economic activity.”

        The question, with all due respect, betrays a simple-minded assessment of an economy [that is rife amongst our polies in Canberra – and elsewhere]. The current state of play is that the (mortgage) debt for individuals is just an entry in a ledger (as indeed is credit-card debt). Tax cuts to retire this kind of debt has NO multiplier effect because the “advance” of money has already occurred. Reducing company tax just blackens the bottom line and has no material effect upon the consumption of the fat cats. Company tax (considering Canada, USA, Australia, UK & NZ + elsewhere) did not change from the 30s to the “boom” periods of the 1950 through to the mid 70s to any great extent. Similarly for PAYE.
        The above is all to evident in the Pasinetti models of growth. Further, consider the Gini coefficient for Australia (31.3 in 1981 and 34.7 – worse – in 2010). In un-egalitarian USA the value was 34.6 in 1981. [https://data.worldbank.org/indicator/SI.POV.GINI?locations=AU] A gentle read-up of Lorenz curves might come to be informative.

        “If you are not minimising your tax you are funding the downfall of society.”

        is not a creditable sentence. I (personally), while occupying positions of responsibility within the Public Sector, (in days gone by) have witnessed considerable waste of public money and ditto for anyone who has occupied such positions. But let’s not confuse the quality a vehicle with the competence of the driver. Consider the economies of northern Europe or indeed Scandinavia. Norway has the same GDP per capita as the USA but the life of the “average” person in the USA is a battle to say the least (qua Trump’s election) compared with the residents of Norway – and elsewhere where taxes approach 50%.

  6. Coral SeeNQ

    I addition to the analysis here there is a growing body of thought that suggests that after ‘trickle down’ tax cut policies are put in place, this is followed each time by a screaming outcry by the perpetrators of these now discredited policies by an outcry about ‘budget deficits’ and the need to cut services and welfare. a moral panic descends regarding the ‘budget deficit’ you recall our debt and deficit disaster “spin cycle” which is what we can now call the following term of a Labor Govt instead of the legititmate right it has obtained to implement it’s platform with a focus on services infrastructure productivity like NBN and building and human capital. Dianne Fienstien is predicting that if house and or Senate are regained in the mid-terms this will be the outcry from venal Republicans who have done their skinny repeal and will seek to attack entitlements in the US destablising it in a very dangerous way in my view by creating so much income inequality that they create great foment in the population at large.

  7. Dog's Breakfast

    “To sum up, there are only three things wrong with GDP as a measure of economic welfare: it’s Gross, it’s Domestic, and it’s a Product.”

    Well that’s just a classic John. I will quote you with attribution.

    The entire economic modelling profession is off its bleeding rocker. The only point in economic modelling is to know enough to be able to poke holes in their fishnets. It’s so bad, it’s hard to believe.

    More facts getting in the way of a good government hand-out to those who need it least.

  8. Robert Garnett

    I sometimes think I’ve fallen through the Rabbit Hole with Alice.

    Small business people pay minuscule amounts of income tax. Everything they do is “bought for the business” Everything is a tax deductible. Fred Nerk the panel beater buys a couple of Pizzas for the boys on Friday night and guess what; he asks for a receipt and gets a tax deduction as a business expense. No doubt the Vic cans he buys are similarly treated.

    It is the wage and salary earners and consumers who pay the taxes in this country. Not small business and certainly not big business. My friend was a farmer. He retired from the farm and then got bored and drove trucks for a salary. The first tax year he complained bitterly that he had to pay $7,000 income tax. Such a lot!! I had been paying up to that point in time $25,000+++ in tax every year so $7,000 would have been great for me. An uncharitable person might have asked what what income tax had he been paying as a farmer if he thought $7,000 was a lot. A rhetorical question. My old man worked for a greengrocer in the forties. My father asked him how he worked out his tax liability as he kept no records. The greengrocer explained that he paid as much as he thought he should.

    Some other friends, and I use the word friends in its broadest, sense operated a motel and purchased a house full of new and very expensive furniture for their new house. Of course this was all expensed against the motel’s books and in fact the furniture was stored in one of the motel units at zero cost. And yes they were very good people. Respected in the community. Pillars of society.

    I would say FA has changed.

    Why can’t us salary earners do the same as my old man’s greengrocer and the motel owners.

    The treatment of salary earners by Government in this country amounts to little more that robbery. You earn a wage and then the bastards just deduct the tax amount from you. And what you get for it. If you live in the country – nothing. If you live in the city you get overcrowding, congestion and not much more. The irony is that the employers steal the tax for the Government and then pay accountants and lawyers considerable sums to insure they don’t end up like their employees who they steal from.

    With the weakening of unions by the Labour Party (Hawke, Keating) and by the “Champions of the “battlers” the Liberal & Nazi Party (Agrarian Socialist Worker Party) most people have no security of employment and no chance of any reasonable increases in earnings (even the RBA is concerned). All the spoils go to the Gerry Harveys of this world who wanted to increase taxes on ordinary people by making sure they don’t avoid GST when they made internet payments. Of course they succeeded. How much is Harvey, a rather ordinary white goods salesman worth? Wikipedia reckon it’s $1.5 billion.

    What the f..k does he do. He couldn’t design, manufacture or probably even use what his franchisees sell, but he makes more than all of the people who actually design and make this stuff put together.

    He is quoted as saying:

    “I went to university for a couple of years and I didn’t enjoy university. The studying and the accountancy, economics, I just hated that stuff. Now the irony is here I am lawyer, accountant, I do it all day every day and sit at a desk. So I’ve never ended up where I wanted to be in many ways. I always wanted to be a farmer.”

    He even admits he is a nong. But he’s worth $1.5 Billion.

    He reckons he’s a lawyer and accountant, but I bet he pays a whole heap of lawyers and accountants to do the real work for his companies, whilst he rakes in the money and complains about his career outcomes and gets himself on the Telly to complain about the competition from the internet. Why is it that these champions of the capitalist system always complain about competition. Of course Adam Smith explained this;

    “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

    No doubt Harvey pissed in may pockets to win this one.

    If Harvey wants to be a farmer and he has $1.5 billion why can’t he? Perhaps he is lying about this and trying to make people feel sorry for him which is what most people like him are really good at. What they say and what they do pass like ships in the night.

    The majority of people in this country are mugs.

    I’m a mug, but at least I know I am one and I admit it.

    But what can I do?

    1. billy campoven

      What can you do? Support the push for flat rate income tax, no deductions for both individuals and companies, with a sliding scale at the bottom end and lift the tax free threshold for low income persons. Singapore and Hong Kong both have flat rate 17% for domestic income and 0% for IBCs. Also high VAT. We have 10%GST so an income flat tax of 10% will get those tax dodgy multinationals to pay because of the costs of transfer pricing. Give them incentive to pay, carrot, and a big stick if they don’t.

      1. kyle Hargraves

        A former Premier of Queensland, Sir Johannes Bjelke-Petersen, advocated “flat-tax” when during the campaign of “Joh for PM”; a truly scary imitative best left to one side.

        Until that proposal the programme wasn’t taken particularly seriously but the prospect of “flat tax” was met with a good deal of gnashing of teeth by the hoi-poli.

        Take a look, when the opportunity presents itself at the Tax Code for Australia; it’s about the size of two standard house bricks. Then compare that volume with a similar code from a country in northern Europe. Enough said.

        1. billy campoven

          Who comes first? Because that is the only position that counts. No one cares who comes second. If any government is responsible for service provision, it’s local gov.

  9. AR

    Even Laffer disowned the way his tip-over graph, drawn on the back of a bar coaster, was used and abused by politicians.
    The only question is, are they truly as stupid as the evidence suggests or are they conniving, corrupt and complicit in dumb ideas that anyone with a basic understanding of arithmetic can laugh off the table?
    I’d reckon both.

    1. bref

      I reckon you’re right, both.

  10. leon knight

    What part of Morrison’s Christian beliefs allows him to lie with so much conviction? Why do so many gullible people here and in the US believe this oft-repeated tripe?