ANALYSIS
There's no case for a corporate tax cut when one in five of Australia's
top companies don't pay it
By chief economics correspondent Emma Alberici
Updated Wed Feb 14, 2018 at 11:53am
There is no compelling evidence that giving the country's biggest
companies a tax cut sees that money passed on to workers in the form of higher
wages.
Treasury modelling relies on theories that belie the reality that's
playing out around the world.
Since the peak of the commodities boom in 2011-12, profit margins have
risen to levels not seen since the early 2000s but wages growth has been slower
than at any time since the 1960s.
It's also disingenuous to talk about a 30 per cent rate when so few
companies pay anything like that thanks to tax legislation that allows them to
avoid paying corporate tax. Exclusive analysis released by ABC today reveals one in five of
Australia's top companies has paid zero tax for the past three years.
And while the Treasurer and Finance Minister warn that Australia's
relatively high headline corporate tax rate means Australia remains
uncompetitive and companies will choose to invest in lower taxing countries,
the facts don't bear that out. Business investment in Australia has been
at historically
high levels over much of the past decade despite our comparatively
high headline corporate tax rate.
There's more to
investment than corporate tax rates
Before Donald Trump cut the US corporate tax rate earlier this year, it
was 5 to 9
percentage pointshigher than Australia's. That hasn't deterred
Australian companies from seeking opportunities in America instead of Ireland,
where the corporate tax rate is less than half ours (12.5 per cent), or
Singapore (17 per cent).
In truth, businesses make decisions about where in the world to park
their money based on myriad reasons, possibly least of which is the headline
corporate tax rate.
Will I be closer to my main customers? Where is the best talent located?
What are the labour costs? How onerous are the regulatory hurdles to
investment? Is the culture and language easy to navigate? Is the country
politically stable and is there respect for the rule of law?
When Incitec Pivot chose to build a
$1 billion factory in Louisiana rather than Australia, it did
so due to America's strong productivity levels and its speedy approvals
processes. Tax was insignificant on the pros and cons list.
Tax rates don't
matter if you're not paying tax
High-profile chief executives like Qantas chief Alan Joyce are adamant
that investment decisions rest largely on the rate of a country's corporate
tax. But it's hard to see how a lower tax rate is an incentive for investment
when one in five of our biggest companies haven't paid any corporate tax at all
in at least three years.
Qantas is about to clock its 10th year tax free. Qantas won't pay tax
again until its profits exceed the tax losses recorded since 2010. Only when
all the accumulated losses are offset will a lower tax rate mean a higher cash
flow. Besides, regardless of where the corporate tax rate sits, the airline has
already indicated an intention to invest $3 billion
across 2018 and 2019.
The overwhelming benefit of higher profits flows to shareholders. A zero
corporate tax bill at Qantas has certainly seen one significant wage rise at
the company — the chief executive's. The benefit to workers has been less
pronounced.
According to the Australian Services Union, representing just under half
of all Qantas workers, the average pay rises for staff since the airline has
returned to profitability have barely kept pace with inflation.
Alan Joyce, on the other hand, has seen his total salary
close to double from $12.9 million in 2016 to $24.6 million
last year thanks to a huge jump in the value of shares provided as part of a
bonus scheme.
Linda White, Assistant National Secretary of the Australian Services
Union told the ABC she is far from convinced about the value for workers of a
corporate tax cut:
"While Qantas
workers have seen pay rises of less than 3 per cent on average over the past
decade, we've seen the CEO's salary balloon to almost $100,000 a day — much
more than most workers earn in a year. It doesn't trickle down — it trickles
up, and the rules need to change to give workers a better deal in this
country."
The apples and
apples comparison
When drawing comparisons with experiences in other countries, Canada
provides a good like for like profile.
Australia and Canada share a similar history and are both resource rich
economies. Our financial and political systems are also on par.
Canada cut its corporate tax rate from 42.4 per cent in 2000 to about 26
per cent in 2011, where it has remained. In 2000, Australia cut its
corporate tax rate from 34 per cent to its present 30 per cent.
Business investment rose in both countries during the mining boom but it
rose more in Australia, despite a corporate tax rate that's four percentage
points higher than Canada's.
Economist Saul Eslake says:
"It can be
argued that the mining investment boom was bigger in Australia than Canada but
now that it's over in both countries, it's worth noting that business
investment as a share of GDP was 2.4 per cent higher in Australia in 2016 than
in 2000, as against only 1.5 per cent higher in Canada, despite Canada's
massive cut in company tax."
It is also worth noting that wages have risen by about 20 per cent more
(in nominal terms) in Australia than in Canada since 2000, despite Canadian
companies having had a much bigger corporate tax cut.
Media player: "Space" to
play, "M" to mute, "left" and "right" to seek.
Do workers really
win?
The White House
claims the recently legislated cut in the US corporate tax rate
will translate to higher wages for the average worker of between $4,000 and
$9,000 a year, but there is no credible evidence to support that boast.
In fact, the opposite has been true in practice when you compare
business activity in Britain and America. Between 2006 and 2013, while British
businesses were paying increasingly less in tax (from 30 per cent to 19 per
cent), wages went down not up. UK wages have started to grow over the past four
years but at a much slower rate than in the United States where corporate tax
rates had remained high.
Some commentators
have seized on a study from Germany to support their theories
about corporate tax cuts trickling down to workers. Saul Eslake makes the point
that the German economy is not all that similar to Australia's:
"Among other
things, workers' representatives sit on the 'supervisory boards' of large
German companies so there is probably a different debate within German
boardrooms as to how the benefits of any cut in the corporate tax rate in
Germany might be shared among employees and other stakeholders."
In his speech last week, the Reserve Bank Governor Philip Lowe
reiterated the need for Australia to pursue an internationally competitive tax
system but he did not specify which, if any parts of the Tax Act, might need
amendment. He kept his comments on the topic vague:
"The issue of how the tax system affects the competitiveness of
Australia as a destination for investment is one of ongoing political
debate."
The headline 30 per
cent rate is misleading
Adding to this debate is the issue of average and effective tax rates.
Effective tax rates are said to drive investment decisions and take account of
what companies actually pay once deductions, depreciation and other tax
minimisation strategies are considered.
According to a report published
last year by the US Congressional Budget Office, Australia's
effective tax rate, at 10.4 per cent, is among the lowest in the world.
The average rate paid by American companies in Australia is just 17 per
cent.
The Treasurer's office takes issues with these figures, claiming they
are out of date because they are based on data from 2012. The Government
prefers a study by
Oxford University that puts Australia's effective average tax
rate at 26.6per cent and at the higher end of the scale.
Several analysts consulted by the ABC disagree. Managing director of
Plato Investment Management, Don Hamson says:
"Whilst the
data used in the 2017 CBO report is from 2012, it is the best analysis
available and I don't believe the Australian company tax landscape has changed
significantly since 2012."
Dr Hamson has worked in banking and finance in Australia, as a
university professor in Australia and the United States and has served on the
ASX Corporate Governance Council.
Regardless of which effective tax rate you prefer, both the Oxford and
the CBO data demonstrate the folly of focusing exclusively on the headline
corporate tax rate of 30 per cent.
Do tax cuts boost
investment?
Chris Richardson from Deloitte Access Economics told the ABC's Q&A
that there was a "consensus" from the experts about the macroeconomic
benefits of a corporate tax cut.
He said the cut represented $20 billion a year in growth for the
Australian economy with two out of every three dollars showing up as higher
wages. Those figures (and experts) came from
Treasury who provided modelling on behalf of the Government.
The numbers are based on the widely, but not universally, accepted
theory that cutting the company tax rate will raise investment, which should in
turn boost productivity and lift wages.
Apart from the obvious point that all else is not equal in practice, not
all investment boosts labour productivity.
According to other
Treasury-commissioned modelling, if the rate is lowered from 30 per
cent to 25 per cent then gross domestic product will double by September 2038
as opposed to December 2038 without the cut. Both models predict that in 20
years' time the unemployment rate will be 5 per cent regardless of whether we
spend $65 billion on company tax cuts or not.
In truth, it is hard to find real-world evidence to support these
economic theories, so the Government might be wise to heed the words of Plato:
"A good decision is based on knowledge and not on numbers."
Dividend imputation
often overlooked
The other issue often overlooked is the impact of Australia's dividend
imputation system. Australia and New Zealand are the only two countries in the
OECD that grant companies the right to attach tax credits to dividends paid out
to investors.
In most countries, companies pay tax and then shareholders pay tax on
their dividends. Australia taxes just once. Cutting the company tax rate
therefore doesn't result in a higher after-tax return on investment to
Australian shareholders in Australian businesses so Treasury's theoretical
model doesn't hold.
Experts including economist Saul Eslake estimate that Australia's 30 per
cent corporate rate with dividend imputation raises about as much tax for the
government as a 20 per cent rate without dividend imputation.
The principal beneficiaries of a cut in Australia's corporate tax rate
are overwhelmingly foreign companies and foreign shareholders in Australian
companies. There is no guarantee at all that cutting the tax they pay in
Australia will lead them to increase the level of business investment in
Australia.
Can Australia
afford to spend $65 billion?
The last time a government splashed around cash in the form of tax cuts
the treasurer was Peter Costello, who had no debt and no deficit to contend
with, thanks to oversized profits and attendant corporate tax flowing from the
mining boom.
In 2018's Australia, it's hard to imagine how a government could ever
again manage to give away the equivalent of Mr Costello's $170 billion worth of
tax cuts while still protecting the surplus.
It's been 10 years since the Australian budget was last in surplus. With
a debt of more than $600 billion, many are questioning the merits of
prioritising a $65 billion giveaway to big business in the form of a tax cut.
Back in November 2016, the president of the Business Council of
Australia, Grant King was warning the Government not to put the country's AAA
credit rating at risk by ignoring budget repair. He told ABC's AM
program:
"We are seeing
indications that the deficit is deteriorating so it is going to be a
challenge."
Yet today the BCA and its high-profile members like Mr Joyce are
insisting on a company tax cut that would blow a massive hole in the
Government's revenues and push the budget and national debt further into the
red.
First posted Wed Feb 14, 2018 at 5:42am
Source -
Friday, February 16, 2018
0 comments:
Post a Comment