Nine Reasons Why A Company Tax Cut Won’t Create ‘Jobs And Growth’

Malcolm Turnbull, having failed as a progressive social reformer, is now pinning his hopes for the forthcoming election largely on economic imagery. He wants to be seen as “a safe pair of hands” committed to producing more jobs and growth in the Australian Economy. But what lies behind the smooth imagery? Effectively just one main policy – to cut the business tax rate. It is a huge gamble which would see the government collecting about  $50 billion less revenue over the next 10 years.

Will this policy actually benefit the Australian economy? There are nine reasons to think not.

1. Creating that sort of fall in government revenue will either cause the government’s budget deficit to grow even faster, or it will have to be matched by major cuts in government spending and/or major tax increases, such as a raised rate of GST. In the former case, the interest burden on government debt would increase and the international credit rating could be downgraded (although this is not a particularly serious concern when interest rates on international borrowings are so low anyway). In the latter case, the growth of aggregate demand would be further curtailed, creating additional risk of recession. The only way these troubling political economic outcomes could be avoided is if the cut in business taxes did actually give a substantial boost to the rate of economic growth, which brings us to the next point…

2. The economic growth rate would only be boosted if the effect of the cut in business tax were to markedly increase capital investment. Investment has been in the doldrums during the time the current Coalition government has been in office. Businesses evidently have not felt confident about expanding their volumes of production. This, of course, is what the proposed cut in business taxation claims to turn around. But the policy implicitly makes a very strange assumption about the relationship between profits and investment. It assumes that businesses will undertake more investment each year into the future just because they get more after-tax profits in each preceding year. As every economics student learns, however, what drives investment is not the amount of internally-generated funds available to businesses: rather, it is the expectation of increased demand for the products (relative to the cost of raising capital, which is already at record lows). In the absence of growing demand for their products, businesspeople will not invest in expanding their firm’s productive capacity just because they have a little more profit left over from last year after the taxman’s take has been deducted. Any additional after-tax profit is more likely to be used for luxury consumption or buying real estate. Is this really what the Australian economy needs?

3. The government would get ‘more bang for the buck’ by putting the same $50 billion into infrastructure spending rather than business tax cuts. Infrastructure spending would improve our transport systems, education and health facilities and the quality of and urban and regional environments. It would directly create more jobs that are directly linked to areas of social need, rather than relying on a more indirect policy that might or might not bear fruit.

4. The one certainty about the Turnbull government’s preferred policy is that it will increase economic inequality. This is a much more reliably predictable consequence of cutting business taxes than is the creation of jobs and growth. One of the factors already causing growing economic inequality in Australia has been the declining share of wages in the national income relative to the profit share. Increasing the inequality further will tend not only to undermine the demand for goods and services, and therefore reduce the incentive for investment and job-creation.
   

   New report from the Evatt Foundation

   It can also be expected to intensify an array of social problems, such as homelessness, mental and physical ill-heath, violence and crime, whose incidence has been shown by social scientists to be linked to the extent of economic inequality. That in turn will increase the need for government expenditure to deal with those social stresses, tending to blow out the budgetary deficit even further in the longer term. A new report by the Evatt Foundation carefully documents how pronounced the inequalities in wealth already are in Australian society. The last thing the nation now needs now is to be strongly pushed further in an inegalitarian direction.

5. Businesses don’t generally pay the standard rate of tax on their profits anyway. According to research by the Tax Justice Network, the average payment is actually around 23%, not the standard 30% tax rate. Many large businesses employ tax minimisation specialists who use every available loophole for this purpose. The giant mining company, Glencore, for example, paid zero tax over three years on Australian business income that totalled approximately $15 billion. The Australian Tax Office has disclosed that no tax at all was paid in the 2013-14 financial year by 579 companies which had a combined turnover of $406 billion. Apple is one of the most notorious tax-minimisers: its tax bill in 2014-15 amounted to just 1%of its revenues. Macdonald’s has also become well-known for its use of Singapore as a place where profits from its Australian operations can be effectively shifted for tax-minimisation purposes. Tax havens are commonly used by businesses and the wealthy to escape tax liabilities. Malcolm Turnbull personally knows this. Yet his current one-trick policy – usually couched in terms of helping innovative yet struggling ‘small’ businesses – seems oblivious to what payment of business taxes actually involves in the case of many companies.

6. The economic modelling that underpins the government’s claim that cutting business tax will creating jobs and growth is highly questionable. Like any modelling, it involves making assumptions about how the economy works and how are things will develop in future. In this case, the modelling is particularly contentious. It makes clearly unrealistic assumptions about the absence of unemployment, the continuous character of market equilibrium and the capacity of the economy to quickly adjust to a more rapid growth path. Researchers at The Australia Institute have carefully documented these problems, and ABC economic journalist Stephen Long has exposed the shaky foundations of the forecasting exercise. What is actually most remarkable is that, even with these pro-growth biases embedded in the technical modelling, the projections of additional economic growth are remarkably small. The predicted boost to GDP over the ten year period is only 0.6%, which is really quite tiny. The 0.6 percent is a cumulative figure over the decade, not an annual increase in economic growth. It is so small that it is within the margin of error of macroeconomic modelling exercises of this kind. In the real world, future events such as global financial crashes, recessions, and the economic fall-out from climate change, are likely to blow any such projections wildly off-course anyway.

7. The policy reliance on cutting business taxation reflects a faith in ‘trickle-down economics’. This is the belief that giving wealthy people even more income will eventually benefit everyone. It is a self-serving elite ideology, rather than a sound economic basis for creating economic prosperity. It was deeply embedded in the policies of US President Ronald Reagan, for example, emphasising tax cuts for the wealthy as a means of creating more incentives for wealth-creating private enterprise.
   

   Open letter from Australian economists to Malcolm Turnbull

   Reaganomics caused both economic inequality and the budget deficit to surge. Yet neoliberals have not lost faith, it seems. In Canada, for example, conservative governments have made major reductions in business taxation over the last couple of decades, seeking to stimulate faster economic growth. However, as Canadian economist Jim Stanford (now working for The Australia Institute’s new Centre for Future Work) has shown, the promised boosts to investment and jobs failed to materialise. Do we really need to repeat this lamentable experience here?

8. A further problem arises because of so many shareholdings are now internationally spread. Shareholders are certainly one group that might be expected to benefit from cuts to business taxes, although how much they would benefit depends on whether companies were to distribute the extra after-tax profits as dividends and what might happens to the share values. In the case of the cut in business taxes that Malcolm Turnbull proposes, the most advantaged shareholders would actually be those located overseas. This is one of the clearest features arising from the otherwise questionable macroeconomic modelling commissioned by the Treasury – that capital outflow would likely be one of the largest distributional consequences of the proposed tax cut. Nor is this surprising.Local shareholders will generally get no benefit because the dividend imputation system adjusts their tax liabilities in line with what the companies have already paid. Rather, it is overseas shareholders who will reap the major rewards because they are not covered by Australia’s dividend imputation arrangements. Interestingly, another beneficiary will be the US government’s Internal Revenue Service (IRS). The IRS taxes US owners of foreign shares at the US company tax rate of 36% (a rate which is clearly above the business tax rate in Australia) but deducts from that personal tax liability whatever tax the US shareholders have already paid to a foreign government. So the IRS will get more revenue from US shareholders as a result of the Australian government cutting the business tax rate here. Meanwhile, the Australian Tax Office gets $50 billion less.

9. Even in the unlikely event that the policy of cutting business tax were to increase the rate of national economic growth, it would not necessarily create the form of jobs that are sustainable for the future. The proposed cut in business taxes would do nothing to facilitate this necessary structural change. The tax cut would apply equally to coal-mining companies and to renewable energy providers, to sunset industries and to potential sunrise industries.  What Australia needs is to transition to a more ecologically sustainable future: that means creating a wide array of  ‘green jobs’ and work that is directly geared to producing for social needs. There is nothing in an across-the-board cut in company taxes that would help bring this vision to fruition. Malcolm Turnbull recurrently talks of the need for our economy to ‘transition’ to a different future that is less dependent on extractive industries, but the business tax cut policy makes no contribution to achieving this. A more selective approach to industry development is needed, which could include embedding environmental criteria in taxation policies, among other policies, but this is evidently quite beyond anything that the Coalition can contemplate..

These are nine strong grounds for deep scepticism about the Coalition government’s signature tax policy for the Australian economy.

The Coalition has pinned so much on this one policy to support its promises about ‘jobs and growth’. Malcolm Turnbull and his Treasurer Scott Morrison have even called it an ‘economic plan’, apparently oblivious to the fact that is it nothing of the sort. An economic plan involves setting specific targets and identifying the array of policy instruments that will ensure the achievement of those targets. This is not what is currently on offer. The Coalition’s signature business tax policy is just rhetoric, really not much better than an Abbott-style three word slogan, hitched to a huge give-away to the ‘big end of town’. Were the Coalition government to be re-elected, it would surely go ahead with the policy, but it would predictably lead on to some quite different additional policies (once again). When the promised ‘jobs and growth’ fail to materialise, as they surely would, there’d be the need for the government to introduce a higher rate of GST or engage in swingeing cuts to social services, health and education in the attempt to get the government budget back into surplus.

This Saturday provides an opportunity to ensure that the problems I have enumerated here do not bedevil us all in the years to come…