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Who are the real villains when it comes to tax — short-sighted governments or greedy corporations? Will cutting company taxes increase wages, or merely line the pockets of an idle rich? Are all company bosses baby-eating imperialists, or are the vast majority honest Australians doing their best to get by? All these questions and more will be answered in the new Crikey series “Beating the bandits: who’s robbing whom in the great corporate tax heist?”

Part One

Dec 12, 2017

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.

Part Two

Dec 13, 2017

Australia shouldn't follow the US on company tax cuts

The Business Council of Australia (BCA), and its proxies in parliament, currently find themselves closely aligned with US President Donald Trump in making the case for massive tax cuts: US$2.4 trillion over 10 years in the case of Trump, and over $60 billion over 10 years under the Turnbull government’s tax-cut plan. Neither are funded, although the Republicans are looking for tax breaks to close down to provide some offsetting savings.

Both Trump and the Turnbull-big business alliance here insist that the benefit of the cuts will primarily flow to workers through growing wages, stronger employment and higher economic growth. That’s despite real-world evidence that, to the contrary, corporate tax cuts mainly benefit shareholders and corporate executives. The Trump tax-cut agenda has prompted some key institutions and highest-profile economists to challenge the claims being made by Trump and the White House about the claimed benefits of massive tax cuts for the world’s biggest companies. Here’s a sample of how the US debate has proceeded in recent months.

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Part Three

Dec 11, 2017

Three ways to cut company tax while improving welfare

The US Congress recently passed tax bills through the House of Representatives and the Senate that cut the US headline company tax rate from 35%, the highest rate in the world, to 20%.

The US Internal Revenue Service collects very little revenue from its current company tax. The system is broken, with a high rate, narrow base, and loopholes that permit its largest multinational enterprises – Google, Apple, Amazon and big pharmaceutical companies – to keep trillions of dollars offshore, out of the tax base. Half of US domestic business investment now goes through “pass-through vehicles”, like limited partnerships, which avoid company tax.

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Part Four

Dec 15, 2017

Not every CEO is a fat cat, child-eating imperialist

Eyes seem to roll when business and business groups like the Australian Chamber of Commerce and Industry (ACCI) call for tax cuts — which is a pity. It’s not like many (or any really) of Australia’s 2 million-plus businesses are fat cat imperialists who like nothing more than to exploit workers and eat small children.

There is bad behaviour certainly. Unethical and illegal behaviour, and our society — the media and other businesses — rightly calls them out. We should continue to work together to weed out these individuals.

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Part Six

Dec 11, 2017

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

So, the Republican majority in the US Congress have passed 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.

The primary claim put forward in support of company tax cuts is that they will lead to an increase in investment, or at least prevent the loss of foreign investors to the lower-tax regime being proposed by Trump and the US Republicans. According to Treasurer Scott Morrison, quoting research from the Commonwealth Treasury, if we fail to follow the US lead we will be a less competitive destination for foreign investment.

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33 thoughts on “Beating the bandits – who’s robbing whom in the great corporate tax heist?

  1. And how much and whom is Trump’s ‘NASA distraction’ going to cost?

  2. I broadly agree with this article, but why do we need to have revenue neutrality? We want more revenue (than we are currently raising due to corporate tax fraud). I applaud the suggestion of abolishing dividend imputation, but why does there need to be a discount discount? I mean the purpose of abolishing imputation would mean the company pays the tax rather than shareholders, many of whom would be foreign, so why discount the dividends AND lower the corporate tax rate?

    And I guess disallowing deductions for interest payments is OK if it works, or maybe allowing a deduction for interest paid at some notional market rate.

    Finally, what’s the point in lowering the corporate tax rate when 1 in 3 companies manage to not pay ANY tax? Isn’t that what needs to be fixed? The 3 measures you speak of here go some way towards that end, but I’m sure that’s not all that could be done.

    1. Yes Rupert Murdoch NewsCrap organisation does not pay tax so taxes cannot be cut in that instance. Even Scott Morrison knows that half of nothing is nothing.

      Scott did see clearly the need for gifting taxpayer monies to the failing and flailing Rupert Murdoch NewsCrap organisation; Morrison knows if the LNP gifts NewsCrap taxpayer funds from time to time it is as payment for continuing being pro LNP no questions asked, helps to win elections. It works every time.

  3. One of the Roman philosophers said ” With taxation you buy civilization”, so each time you whittle a bit away it’s death by a thousand cuts.

    1. And it is still true today

  4. Unfortunately I was unable to read Adam Carr’s article fully. Trigger phrases include “hardworking Australians” and “Mums and dads”; concatenated as above I was forced to move on

  5. “Company tax cuts = higher wages = piffle-dust economix”

  6. ABC’s the science show has a great 5 minutes story “Why are the wealthy so wealthy and the poor so poor?”
    The work of Martin Scheffer would suggest that income disparity will accelerate unless we change our thinking.

  7. What happens when these company tax reductions are compared against CEO salaries only?

  8. Seriously, let’s not lose sight of the fact of the impact of these corporate tax cuts on those companies paying “$0tax” now through such things as ‘an intricate labyrinthine web spun to borrow money from overseas subsidiaries’ to pay $millions to the likes of lawyers and accountants/firms hired to find ways around tax laws; executive living expenses (from homes, to their children’s private school education fees, overseas holidays) and their other little necessities of life?
    Think “670(?)” companies, including Murdoch’s Limited News Empire*, Glencore, Adani, Chevron etcx666.
    Think big donors (in monetary and kind/trade*) to the Limited News Party?
    Morrison-Turnbull, “we” stand to make anything from twice to a billion times what we get from them now?

    (* I choked on my can of baked beans, spraying out the candle, watching Q&A last night – there was Sheridan and Hunt whining about “China and left third parties (GetUp! and unions) influencing/buying influence over our political system”, how the right was disadvantaged – when it was pointed out that banks and miners do the same thing as unions. But no one pointed out that GetUp! does what (American) Murdoch’s Limited News does and has been doing for decades (dispensing positive PR for their Limited News Party), to influence voter perceptions? That while GetUp! stands condemned : Limited News is all right?)

  9. high tax countries are also high wage countries, low tax countries are low wage countries, the more workers earn, the more they spend the faster the economy grows, the more they spend the more companies profits go up the more tax they pay, the more workers wages rise the more tax they pay, dropping wages and increasing prices are a recipe for recession, any intelligent person knows this but still the conservatives follow the calls of the greedy 1% to continually cut incomes and services and thereby destroying the economy and forcing people into the working poor, U.S style

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