Expect a renewed bout of spruiking for company tax cuts this weekend after the second quarter GDP results for the US are released on Friday, with forecasts of annualised growth of 4-5%. That kind of result will be taken as evidence of the benefit of cutting company taxes — except that it’s likely to be a one-off effect reflecting what happens when you pump huge fiscal stimulus into an economy already near or at full employment.
Nonetheless, given local advocates of company tax cuts have seized on any evidence from the US they can find to make their case, the Financial Review, the Business Council and the Liberals are likely to cite it as evidence of the need for the Senate to fall into line and pass Malcolm Turnbull’s big business windfall ASAP.
Back in January, everything good that happened in the US was touted as evidence for the wonders of company tax cuts. The AFR editorialised about companies like Wal Mart paying higher wages. Senior business figures seized on US pay rises to claim that company tax cuts here would flow straight through into higher wages.
But since then, US wages growth — which was never strong — has slumped, as even the AFR has been forced to acknowledge. You wouldn’t pick it, but business figures and other tax cut spruikers for some reason aren’t touting US wages anymore as evidence of how great tax cuts are. And the most recent general wages data shows that average real wages in the US are completely unchanged year-on-year to June. Another private sector wages growth indicator showed things are even worse: real wages actually fell in the June quarter, leading to a 1.4% fall in real wages over the year.
So if anything, company tax cuts have been associated with a fall in real wages in the US, not a rise. Which, by the way, echoes the UK experience: since 2008, the UK has cut its company tax rate from 30% to 19%. During that time, real wages have fallen in the UK by around 3% in total. In contrast, in Australia real wages have risen over 6% in the same period despite the wage stagnation of recent years.
Just like here, there’s plenty of discussion about why wages aren’t moving in the US despite historically low unemployment. One argument often advanced both in the US and here is that poor productivity growth is holding back wages. That was expertly shot down recently in a Forbes article that noted that if productivity really was a problem for US companies, they wouldn’t be handing back hundreds of billions of dollars in capital to investors via the explosion of share buybacks that Trump’s tax cuts caused, but investing it to improve their businesses. Remember that Australia’s biggest businesses, like ANZ and Rio Tinto and Qantas, are also handing money back via share buybacks even before they get any Turnbull tax windfall.
Based on the US and UK evidence, any claim that company tax cuts lead to higher wages must now be abandoned. Indeed, there may even be a case that, regardless of what economic theory says, company tax cuts are linked to lower wages. And with wage underpayment revelations emerging about once a week, usually but not only in the retail or hospitality sector, the challenge for Australian businesses at the moment is to pay their workers what they’re actually owed by law, let alone any fictional wage rises from future tax cuts.