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?”
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.
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.
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.
The US, historically considered to be a leader in tax reform, is this time a follower, responding to intensifying competition for global capital around the world. The trend was identified nearly a decade ago by the Henry Tax Review, which recommended that in the “short to medium term” Australia’s company tax rate of 30% should be reduced to 25%.
Now that the US has lowered its company tax rate, this leaves Australia as one of only a handful of countries at this level. These are not unimportant countries: they include Japan, Germany, Brazil, India and France. But they are also facing pressure; Macron proposes a plan to lower the French rate from 33.3% to 28% or lower.
The Australian government’s enterprise tax plan proposes to reduce the corporate tax rate from 30% to 25%. Reform was enacted this year to deliver this for small and medium enterprises (up to $50 million a year in turnover), but not for our largest companies. Arguably, this is the worst possible policy outcome.
The company tax performs many functions and the company tax rate is only one element of the whole system. It’s important to remember that companies are not people who can bear a tax burden. Instead, the company tax operates as a proxy for collecting revenue from economic rents (such as resources), labour and capital.
In a global era, where the rate of return is set by international investors, the company tax pushes up the rate of return needed for investment in Australia, discouraging some investment. Economic modelling suggests that this shifts at least part of the burden to Australian workers.
The company tax rate also has an important role in tax planning by multinational enterprises. The higher Australia’s rate relative to other countries, the more incentive companies have to erode the tax base with deductions, or profit shifting, to lower tax jurisdictions. We have seen this recently in the Chevron case in which very large interest deductions were paid to related companies in tax havens; BHP and Exxon are also in the ATO’s sights, as they have claimed large expenses to reduce their Australian tax bill, shifting profit to Singapore and other countries.
Nonetheless, Australia raises significant revenue from company tax. The proposed tax cut was estimated in the budget at $48 billion over 10 years, or about $8 billion per year. The effect of increased investment could improve tax collections and reduce the fiscal cost to about $4 billion per year according to modelling. But in an era of fiscal deficits, that is still too expensive.
In a recent paper, we argue that the government has options to broaden the company tax base, or modify our corporate-shareholder imputation system, so as to fund the company tax rate cut. So, what to do?
Modelling set out in the table above indicates that the reform options we consider are both revenue-neutral and welfare-enhancing. They are as follows:
The approach of broadening the base and lowering the rate has long been useful in producing efficiency gains and sufficient revenue. We can do this in the company tax by eliminating deductions for interest costs. This is called a comprehensive business income tax (CBIT). We would exempt or provide a discount for dividend and interest income and capital gains at the personal level.
While this appears a radical change, countries are limiting interest deductions around the world, as a response to international tax planning. The Trump tax cut will be partly financed by a cap on net interest deductions.
Dividend imputation was designed on a “closed economy” assumption about investment. Today, it is more appropriate to consider Australian corporate-shareholder tax policy as a “small open economy” context. Domestic investors including high income individuals and superannuation funds that primarily benefit high earners are effectively being subsidised through our refundable dividend imputation system which also generates a bias is generated towards debt for foreign investment in Australian companies.
We could replace full imputation with a partial dividend discount, similar to the CGT discount and combine this with a lower company tax rate of 25%, on a revenue neutral basis.
A tax on economic rents or “super profits” in the financial sector on top of the lower corporate tax rate could also be budget -neutral. We model an 8% financial services rent tax which is a much more efficient than the Major Bank Levy introduced in July. Australia should also continue to levy substantial taxes on our resources, including royalties and profit taxes.
***
Australia cannot direct global tax policy change. The company tax, as it has existed through the 20th century, is becoming increasingly unsuited to a global economy. We see the company tax rate cut as necessary, and call on the government to carry out broad tax reform to ensure fair and adequate taxation of capital and business, while not impeding investment. Such a reform could produce positive fiscal and economic effects and have potential to be combined in designing Australia’s company tax for the next decade.
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.
But for the vast majority, the truth is much more sobering. The businesses that ACCI represents are overwhelmingly made up of ordinary, hardworking Australians. Mums and dads with kids and a mortgage, who’ve taken a significant risk in setting up a small business – in employing people. These are people who often earn little more — and just as often less — than the annual average wage. We are not talking about employee-exploiting capitalists here.
The majority are people of good will, who want only what is good for the country — for their kids, their staff, their customers — and for future generations. They want the nation to be prosperous — today and into the future — and for all Australians to share in that prosperity. Happiness for themselves and for others.
Now we need taxes and no one in business suggests we don’t. Remember, these are families — their kids go to schools, often state schools. They go to the doctor, use hospitals, TAFE, university and their garbage gets collected — they see the value of tax. Just like you.
Having said that, when someone takes a significant amount of risk — when they risk their house, their financial security, their livelihood, etc, to set up a business — they gain perspective: an appreciation of the value of hard work and the value of money — and not wasting it.
Now, when you remember that each dollar that the government raises in tax is one dollar less that a business or household — families in nearly every case — has to spend on non-government goods and services, then you realise that there is a cost to taxation. It reallocates spending in an economy. So one dollar more to the government is one dollar less that business and families have to spend on (the ever rising costs of) electricity, food, clothes, preventative medical care — whatever the case may be. For a business, this might be a new computer, or a piece of manufacturing equipment, etc. This means less spending in those areas of the economy, fewer jobs and less investment.
To a certain extent, the cost of tax on families and businesses is necessary, sure. We obviously need schools, hospitals and we must look after those in need. That goes without saying and no one argues against it. And, naturally enough, government spending in those areas creates jobs and investment in those areas. Jobs and investment that we desperately need. But government investment in schools and health isn’t free — it needs to be paid for.
The temptation for some is to simply call for higher taxes. But this is misguided, as higher taxes don’t grow an economy. As discussed, they simply take money away from business investment, or family spending. High taxes and tax hikes are divisive. Think of it, at a basic level, of people fighting over the pie — not trying to grow it.
Tax cuts, in contrast, grow the pie and ultimately allow for greater investment and money spent across all areas of the economy. More on schools, more on health — more on creating jobs and investment in the government and in business.
How does this work? Well, it ain’t by magic.
Look around at what’s happening in the world. We live in a world of intensifying global competition and in an age of seemingly rapid and accelerating technological disruption. So we need to be smart.
We need to ensure that Australia is an attractive place to do business — that businesses have the resources they need to invest and attract the staff they need to compete. And that means ensuring that the burden of taxation is not too high.
It’s in this way that a tax cut can drive business investment and employment growth — it puts extra money in the hands of businesses and families who then spend it. Lower taxes on business (and households) make our nation more competitive and drives investment, jobs and overall economic activity.
And as the economy grows and businesses and households become more numerous and wealthier, guess what: taxation revenue lifts as well. It makes sense, right? Because there are more businesses and a greater number of people with jobs. It is in this way that tax cuts grow the pie, grow the economy and make the nation as a whole wealthier. This ultimately gives us much more money to spend on all those government services that cost money, but that we want and need — health, education and social services.
Half of the benefits of the tax cuts would flow through to workers through higher real wages, a necessary boost to workers given subdued wages outcomes.
The only way to get Australian wages growing strongly again is through productivity enhancing investments. A competitive company tax rate will primarily benefit workers and wages.
Research from Treasury found that two-thirds of the benefit of a company tax cut would flow to households, primarily through rises in real wages. It found that reducing the company tax rate to 25 per cent would boost real wages by 1.2 per cent, putting hundreds of dollars in the pockets of workers every year.
— James Pearson, ACCI; Jennifer Westacott, BCA; Innes Willox, AIG June 2016
So does cutting company tax produce wages growth? Let’s look at a real-world example. Starting under former Labour prime minister Gordon Brown and continuing under the Tories, the UK government has cut its company tax rate significantly, from 30% to, currently, 19% (although it has tightened some areas of deductions to partly offset the cost). So, has the UK seen real wages growth?
Not so much.
Still, Australia, where the company tax rate has stayed the same — 30% — since the 1990s has also had wage stagnation. So maybe British wages performed better than Australia’s, given the Brits have cut their headline rate to 11 points below our rate …
Hmmm. Again, not so much. Maybe don’t persist with that line of argument, folks.
What about another economy that has cut tax rates but looks a bit more like Australia’s resources-based economy? Say, like Canada. The Canadians cut their federal company tax rate — which is more complex than Australia’s because of provincial taxes — significantly between 2006 and 2015. How did wages fare in Canada compared to us?
Don’t bank on that 1.2% pay rise promised by big business just yet.
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.
The obvious question is whether higher foreign investment will benefit Australia or simply generate additional profits for the overseas investors. Unfortunately, the research findings quoted by Mr Morrison tell us nothing about this question. The headline result is that lower company tax will lead to higher gross domestic product, but GDP is irrelevant in this context.
That’s because GDP takes no account of the flow of earnings to foreigners (that’s where the D for Domestic comes from) or from the additional depreciation needed to service a larger capital stock (that gives us the G for Gross). And of course what matters in the end is not output (P for Product) but income and consumption. 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. As far as the national accounts are concerned, the relevant measure is net national income, the income that is actually received by Australian households.
There’s nothing new about this point. I made it in response to the Henry Review of the Tax system, back in 2010. More recently, the same observation has been made by former Reserve Bank Deputy Governor Stephen Grenville and, in the context of the Republican Party’s proposed tax cuts, by leading US economist Paul Krugman. Such repetition of long-refuted errors is characteristic of the zombie phase of neoliberalism which began with the global financial crisis.
Yet the main Treasury analysis of cuts in company tax rates focuses mainly on GDP. The headline result is that company tax cuts, funded by a hypothetical “lump sum” tax would raise GDP by 1.2%, or more than $20 billion a year. Careful reading however, shows that the vast majority of this increase would be lost, either as profits flowing overseas or as costs incurred in maintaining a larger capital stock. Moreover, the notion of a “lump sum” tax is nonsense, used by modellers when they want to avoid specifying how a tax cut will be paid for, but non-existent in practice.
Buried in the report we find a more relevant model run, that of a company tax cut financed by an increase in personal taxes and a more relevant measure of benefits, the percentage increase in household welfare. This is estimated at a mere 0.1%, a couple of dollars a week for a household on $100,000 a year.
All of this is based on a model of long-run outcomes in a smoothly functioning economy, where capital investments adjust in response to the company tax cuts, leading to increases in labour productivity, which in turn flow through to households in the form of higher wages. There are an awful lot of steps in that process, leading to the question: how long is the long-run?
The Treasury modellers don’t even attempt to answer this question, but the redoubtable Paul Krugman has tackled the first one, for the case of a typical developed economy (he’s talking about the US, but his parameters work for Australia). Krugman estimates that the rate of of convergence of the capital stock at around 6% a year. That means that about half the adjustment will be completed 12 years after the tax cut is introduced, and around 75% after 25 years. Given the minimal expected increase in Net National Income, it’s only after this point that we could anticipate any net gain for Australia.
The second part of the process raises even bigger problems. For most of the 20th century, increased labour productivity generated higher wages exactly as the Treasury assumes. But the experience of the 21st century has been markedly different. Productivity has risen but wages have not.
In the unlikely event that everything works the way the Treasury modellers expect, the mythical average Australian will be better off by an undetectable 0.1% in 25 years or so. Meanwhile, the corporate beneficiaries of the tax cut will be massively better from day one, before they invest a dollar more or hire a single additional worker. It’s not hard to see who the government is working for, here or in the United States.
33 thoughts on “Beating the bandits – who’s robbing whom in the great corporate tax heist?”
Multinationals seem to have little regard for social license – being essentially stateless, seeking money, influence and power. So where does that scenario go if not checked?
If Wayne Swan is so clever about all this, Why did he fail to take ANY action in the matter in the 6 years that he was the World’s greatest Treasurer. H eshould hang his head in shame.
granorlewis, where were you in swans years, the economy was going gangbusters till this mob of economic idiots were elected and its been all downhill since, the recipe for revival is a labor government to clean up the mess of the abbott/turnbull disaster.
Those of us who follow politics know that Swan was working in the Gillard government with a number of OECD economic ministers on a range of policies that would effectively stop multinational tax evasion but the whole program was slashed by smokin’ Joe as soon as he got into the Treasurers office !
Thanks for that reminder that he wasn’t completely useless.
Just mostly.
If Swanny needs to hang his head in shame, what should Costello,Hockey and Morrison do to make amends…assuming necking themselves is too much to ask ?
Granorlewis – Australia avoided the GFC’s massive unemployment and retraction of consumer spending, “the heartbeat of the economy”- Gittins, due to Swan and Rudd’s massive and timely injection of govt funds in to our economy. The rest of the world’s economies tumbled in to recession for years.
Treasury head at the time, Ken Henry, is on the record as saying that hunded’s of thousands of jobs would otherwise have been lost – forever.
If you want a Treasurer to hang his head in shame, look at Costello, who allowed our historic, largest mining boom revenue to be structurally entrenched with tax cuts, largely for the top end of town and business. What do we have to show for it now? Perhaps wistful glances at Norway, who knew how to manage their oil resource corporate taxation for future taxpayers.
The GST Theft Tax should go. It was introduced by Howard, and passed through the Senate with the help of personally ambitious Australian Democrat senators selling out their own party, to pay for a 17% cut in the company tax rate. In a statement which he later repudiated, the venal but eloquent Paul Keating described indirect taxation as “the many pay more so the few can pay less”.
NOT SO Dion Giles. The Democrats went to the 1998 election with a policy so support the GST, provided that fresh food was exempted.
Can a company be malicious?
They are certainly duplicitious, iniquitous, insidious, insensitive – though whether insensate despite/because the ‘human’ element is moot – but malicious?
Tax evasion is self interest which has no interest in externalities except as raw material.
As usual, the Wan Goose’s analysis seems accurate enough but he had his chance, he blew it and nobody listening to him is part of the clamorous future.
(btw, not a fan of this format, it slows up my device and is very clunky)
Strongly endorse AR’s comment re format.
I think you forgot that Swan was part of a minority government. This rather limited his options with DR No and his swinish coterie opposite.
THE LIBS CUT PENALTY RATES AND IMMEDIATELY SMALL BUSINESS SALES DECLINE, how stupid are these small business operators not to understand that cutting consumers discretionary disposable incomes will certainly mean an economic slowdown, the only benefactors from cutting incomes are the multi nationals who do not rely on domestic spending or produce the basic living necessities that cannot be avoided, people simply stop going to the movies, service their own cars, take a cut lunch and stop going for coffee when the discretionary spending part of their income is reduced, this is a recipe for recession.
So much for the Libs being good economic managers. More like a bunch of grey haired old hacks who’ve run out of ideas. The introduction of corporate tax cuts and support for Adani and a coal based power station will lead directly to their demise at the next elections.
I can only hope Labor will have a plan in place and hit the road running when the time comes.
Q ” The introduction of corporate tax cuts and support for Adani and a coal-based power station will lead directly to their demise at the next elections.” A good result but the economic and environmental pain will take a generation to rectify.
A good start would be to immediately identify suitable pumped hydro sites and start developing them (I read the ANU has a list of thousands of potential sites). Longer lasting and better value in the long run than batteries.
Elevated lakes can double as local amenities for swimming, boating and tourism. For gods sake, someone in Canberra use some imagination!
Lakes Torrens, Gairdiner and Macfarlane would be a good start for SA.
AR, those Lakes are mostly dry salt pans at shallow elevations. Useless for pumped hydro, unless they are the receptacles for water flowing down hill from somewhere else. To invoke a cliché, in the driest State in the driest continent, I don’t see how you could make it work.
Cool story, bro.
Would have been a great one to hear when you actually had power to wield.
WSwan was a FedTreasurer!
Allowing a tax deduction for capex can obviously result in losses, in which case tax would be nil in that year.
Elementary, but don’t spoil a good sensationalist story. Embarrassing!
Australia should not follow anything those idiots do. The USa is a fool of a place to my way of thinking.
Oz following Trump’s tale – if only wishing could make things be so?
But to be fair, the BCA has sunk a lot of funds into the Limited News Party – they have a right to expect a return on that investment : and screw the rest of us.
….. Good thing their not “foreign interests trying to influence Oz politics”?