Swan: Australia's great corporate tax heist
Once again Labor’s 2013 tax transparency legislation has proven that sunlight is the best disinfectant. Last week the ATO revealed that one in three public corporations paid no corporate tax in the 2015-16 financial year, echoing the results from the previous year and exposing the maliciousness of companies that engage in corporate tax evasion.
While there are legitimate reasons for some companies to pay no tax – operating at a loss, for instance – when companies like Chevron, Exxonmobil and Shell record a combined $13 billion in revenue but contribute precisely $0 in tax, it is clear that the Turnbull government is not interested in walking the talk on corporate tax responsibility.
But there is a deeper question to be asked: if one in three public corporations aren’t paying corporate tax already, why is the Turnbull government willing to go to the wall to deliver corporate tax cuts?
The answer is that the political right in Australia, just as in the United States, has sought, since at least the 1970s, to wind back our progressive tax system and undermine the role of government in supporting a prosperous economy and fair society.
To understand the political right’s long game on tax cuts, we need to go back to Arthur Laffer’s 1974 meeting with key members of Republican president Gerald Ford’s administration.
During the meeting, Laffer scrawled on a napkin a simple graph to show that a cut in the tax rate could increase total revenue by encouraging the business investment that would drive economic growth. Laffer’s now-infamous napkin scribble became known as the Laffer Curve, serving as the paper-thin justification for the neoliberal economic revolution of the 1980s and 1990s, which argued that lower tax rates and less government regulation would drive economic growth and higher living standards.
We now know of course that in America, the neoliberal economic revolution didn’t deliver strong economic growth or high living standards. Instead it drove the rampant income and wealth inequality that hollowed out the US middle class and prompted the biggest economic downturn since the Great Depression.
Despite the remarkable failure of the neoliberal revolution, a small but powerful group of ideologues, led in Australia by Malcolm Turnbull and in the United States by Donald Trump, continues to preach the virtues of trickle-down economics.
The standard trickle-down argument goes that corporate tax rates, irrespective of their current level, are “too high” and must be lowered to drive investment and to ensure our economy remains competitive.
It’s a brilliantly simple and seductive argument, which has proven almost impossible to eradicate … but like so many overly simplistic arguments, it too disintegrates when brought into the light.
Between 2011 and 2016, Australia’s economy grew by 15.6%, putting us 11th among OECD nations. But not one of the 10 countries that recorded stronger economic growth over that period did so by cutting taxes. For the Turnbull government’s trickle-down myth to hold, Australian companies would have to be facing tax rates so eye-wateringly high that profitability was nearly impossible, but as the recent ABS business indicators reveal, company gross operating profits are 20% higher over the year and dividends have continued to rise.
Similarly if tax rates were the magnet for foreign capital that they’re claimed to be, then 97% of applications to the Foreign Investment Review Board wouldn’t be coming from countries with company tax rates that are lower than Australia’s.
When compared with other OECD countries, Australian companies do not face exceedingly high tax rates. A recent report from the US Congressional Budget Office calculated that a hypothetical US-owned company setting up operations in Australia would face an effective corporate tax rate of 10.4%, a rate below that of more than half of all G20 economies.
Alternative estimates from Oxford University’s Centre for Business Taxation put Australia’s effective corporate tax rate at 19.6%, but the composition of the assumed “investment” made by their hypothetical foreign-owned company looks markedly different from the average Australian company’s balance sheet, which biases their tax rate estimate upwards.
Regardless, these figures should blow out of the water the Business Council’s claim that Australia’s corporate tax rates are uncompetitively high, or unattractive to foreign investment.
The most egregious argument put forward in favour of a corporate tax cut is that the benefits will flow to workers. The Treasury’s own modelling shows the government’s proposed 5% corporate tax rate cut would only increase employment by 0.1% by 2026-27.
Even CEOs who should be in favour can see through the hubris, such as former Adobe manager David Mandels:
As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability [as a result of a corporate tax cut], we would have been delighted, but it would not lead in and of itself to more hiring or an increase in wages. Again, we would hire more people if we saw growing demand for our products and services. We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would ‘pocket it’ for our investors.
The belief that companies make their investment decisions based on corporate tax rates or that wages are determined by tax rates alone is the great tax con.
As the RBA’s Luci Ellis noted several weeks ago while admonishing the Business Council of Australia for their ideological pursuit of corporate tax cuts, businesses make investment decisions based on a range of factors including “the business environment, the institutional framework, the rule of law, the macroeconomic outlook, the educational base of the country and where the resources are”. For a multinational corporation deciding where to set up operations, the corporate tax rate does matter – but it is far from the only thing that matters.
BHP Billiton is a multinational corporation with great powers of creativity, but all the creativity in the world cannot move our substantial subterranean iron ore deposits so that they may be mined in a country with a lower corporate tax rate. If it is buried in Australia, it must be unearthed in Australia. Facing this geological reality, BHP has engaged in all manner of creative bookkeeping procedures to take advantage of tax rates as low as 5%, in Singapore, on Australia’s common wealth.
Australia could lower its corporate tax rate to 5% and enjoy a momentary economic boost, but the heart would soon be ripped out of our economic prosperity. A strong and rigorously enforced tax system is the quid pro quo for any companies that wish to operate in Australia and enjoy the public infrastructure, health and education systems that make this country an attractive place to do business.
The relentless erosion of our tax base by a few large corporate tax termites in Australia threatens the foundations of our prosperous economy and fair society. We cannot fall victim to their baseless appeals for leniency or shelter while their rampant minimisation and avoidance is in the light for all to see.