Deconstructing Moral Panic over Company Taxes

The Coalition government’s “Jobs and Growth” agenda is already in big trouble, only months after serving as the centerpiece of its reelection campaign.  Australia lost 34,000 full-time jobs last year, underemployment is at record levels, and GDP growth has slipped into negative territory.

When bad things happen, politicians need to look busy.  So the government is rejuvenating its proposed 10-year schedule of company tax cuts.  On this issue (like immigration), the Coalition is riding Donald Trump’s coattails, claiming that his plan to cut the US rate makes it imperative for Australia to follow suit.

Needless to say, selling $50 billion in company tax cuts from a government facing significant deficits and cutting other programs, is a political challenge of the highest order.  Only by stoking fear of the dire consequences of failing to cut taxes, might the public be prepared to swallow this pill.  Cue appropriately dire headlines in the Murdoch press – always helpful when moral panic is needed.  A recent Weekend Australian (January 28) provided a telling insight into the themes the government will emphasise in the months to come.  It featured a banner front-page headline, and accompanying two-page article (by Simon Benson), on the disasters ahead if we don’t cut company taxes.

Benson’s article painted an alarming scenario of the risks of not acting – using words like “crisis,” “stark warning,” “grave message,” and “globally stranded.”  But the actual news content of the article was scant: consisting primarily of quotes from three business leaders about why tax cuts are needed.  It’s hard to see, on pure news value, how this article merited banner front-page treatment.

One of the interviewed CEOs, Richard Goyder of Wesfarmers, was introduced as Australia’s biggest private employer.  He spoke of plans to shift capital to the United Kingdom because of lower taxes (never mind Brexit).  Of Wesfarmers’ 220,000 employees, 10 percent of them live in other countries.  And of those employed in Australia, over half work at Coles stores.  Almost all the rest work at other retail chains (including Bunnings, K-Mart, Officeworks, and Target).  Most of Wesfarmers’ employees are in part-time, low-wage positions.

Retail jobs are not going to leave Australia.  So long as Australians have money to spend, stores will spring up to serve them – whether owned by Wesfarmers or someone else.  And the number of people employed in retail is not limited by the capital investment of Wesfarmers; it is limited by the spending power of Australian consumers.  (If anything, capital spending by retail giants on new big box stores, like Bunnings, has reduced overall retail employment.)  What might Wesfarmers do in the U.K.?  Likely expand its existing investments there (like the Homebase chain it bought last year).  But there’s no conceivable way that could affect retail employment in Australia.

The only empirical evidence cited by the Weekend Australian was very curious.  It listed OECD data showing that company tax revenues constitute a higher proportion of total tax revenue in Australia (16.8 percent in 2014) than most other industrial countries, almost twice the OECD average (8.8 percent).  That sure sounds scary, but consider what it actually means.  That ratio doesn’t indicate how harshly companies are taxed, it merely indicates the relative role of company taxes in a society’s overall tax base.  That’s a different concept, and can lead to counter-intuitive policy implications.

One way to bring down that ominous ratio, for example, is to bring down the amount of profits that companies earn (and hence the taxes they pay).  And that’s exactly what has happened in Australia with the end of the resource boom (and the super-profits earned, for a while, by mining companies).  In 2007 company taxes accounted for a remarkable 22.9 percent of all tax revenue – not because of confiscatory taxation, but because of the remarkable profitability of Australian business (combined with the modest level of other taxes here).  The Australian should celebrate this dramatic fall in the ratio of company taxes to total taxes: from 22.9 to 16.8 percent in just 7 years.  But that would undermine the desired shock effect.

Another way to reduce that dangerous ratio would be to increase other taxes in Australia.  After all, total taxes are lower in Australia (relative to GDP) than most other OECD countries, and now rival the low-tax U.S.  Company taxes would seem less important if we followed other countries and collected more taxes in other ways (like social security contributions).  But presumably that won’t elicit The Australian’s endorsement, either.

In fact, a key reason for the proportionate importance of company tax in Australian fiscal policy is the consistently superior profitability of Australian business.  It’s difficult to compare aggregate profitability across countries, but the OECD tries to.  It reports that the gross operating surpluses of Australian businesses (including small businesses) accounted for 42.3 percent of total GDP over the eight years ending in 2014.  That’s higher than almost every G7 economy – including the low-tax U.K. and U.S.  (Only Italy, with its huge small business sector, was higher.)  If companies earn more here (led by lucrative banking, property, and resource firms), then they’ll pay more in taxes.  That’s a sign of opportunity, not oppression.

The Coalition’s effort, backed by sympathetic media outlets, to foment fear and foreboding about company taxes is an uphill battle.  The reality is that Australia has been uniquely good to its major businesses.  Profits are high – one reason foreign investment continues to pour in.  (Whether that’s good or bad is another debate.)  Other taxes are low, and the overall system in only weakly redistributive – explaining why inequality has been growing so fast, and why the political base for still more trickle-down economics is evaporating.  In short, the scare campaign around company taxes is not very scary at all.