The Australian Financial Review’s Chris Murphy has written an opinion piece which is bursting with passion for a company tax cut. Given the government’s other fiscal commitments, especially the commitment to a surplus, we know that the company tax cut will be at the expense of increases in either personal income tax or the GST or a cut in expenditure relative to what would otherwise have been the case. It would be interesting to hear Murphy’s preference. He does not venture an opinion on that.
He also fails to take into account common wisdom. Nobel prize winner Joe Stiglitz has previously made the point that to assert that company tax can make some options less viable would :fly in the face of elementary economics”. He makes the clear point “if it were profitable to hire a worker or buy a new machine before the [company] tax, it would still be profitable to do so after the tax… no investment, no job that was profitable before the tax increase, will be unprofitable afterward”. Yes company tax lowers the after-tax return on investment but it also lowers the after-tax opportunity cost of that investment.
Murphy says that current company tax is a bigger drag on the economy than the other main taxes. However, Stiglitz insists that company tax is akin to a tax on economic rent and as such does not interfere at all with economic activity. Jane Gravelle of the US Congressional Research Service has also concluded that the empirical literature suggests no negative effects associated with company taxes.
Despite these “elementary economics” neither Murphy nor the BCA and their hired guns have thought it necessary to show why standard textbook economics based on maximising behaviour should be jettisoned. Instead they merely assert that investment in particular is negatively related to the corporate tax rate. It may be that their particular view of the world is the one incorporated into their modelling exercises, and so macroeconomic benefits can be obtained within their own model. Even then the outcomes are very small. Most people must have wondered what all the fuss was about when Treasury modelling accompanying the 2016 budget showed less than a 1% increase in welfare after a ten year uncertain transition.
Murphy stands in his own glass house but wants to throw stones, leveling several charges against The Australia Institute (TAI). Murphy asks when TAI will acknowledge that a “reduction in a country’s company tax rate helps reduce profit shifting”. Murphy might be sensitive that we rolled about laughing at his “morality dividend” which is supposed to recoup a big share of the cost of the tax cut in his modelling. Multinational tax avoidance is a serious issue that TAI has addressed in the past. There are potential mechanisms to address multinational tax avoidance but no amount of profit shifting to Singapore changes the fact that BHP mines, and has all its economic activity, in Australia.
Murphy’s referring to the “changing justifications offered by critics for not cutting our company tax rate to 25%” raises an interesting point. Murphy as much as anyone would be aware that the early Treasury modelling did not properly incorporate dividend imputation and treated franking credits as a government “transfer” to the household sector and so independent of the incentive structure facing Australian investors. Perhaps the critics forced the modellers to lift their game.
Essentially, the research in this area continues to suggest there is little or no gain from a cut in the company tax rate. Dividend imputation means that Australia’s investors do not benefit from a company tax cut — only foreign investors benefit. And we do not need to hand out gifts to foreign business as Australia has never had any problem attracting investment, including substantial interest from countries that have much lower company tax rates. The shifts from one argument to the next from the government was because time and time again, their arguments were found to be wanting. Sometimes you can win at whack-a-mole.
David Richardson is the Senior Research Fellow at The Australia Institute