An international tax expert has warned of a global “race to the bottom” in corporate tax cuts.
“Many people fear this is a race to the bottom, and it may be difficult to reverse this international trend,” Dr Antony Ting told The New Daily.
In the year 2000, the average tax levied by OECD countries (including Australia, USA and UK) on corporate income was 30.5 per cent. In 2016, it had fallen to 22.8 per cent.
“The theory is what we call the ‘trickle down effect’. If we cut company tax rate, then more investment comes and employment will be improved and everyone will share the benefits,” Dr Ting said.
“That argument is becoming increasingly difficult to sell to the public. Many people do not see the benefits trickling down, and in fact there is much evidence to show that the wealth distribution is increasingly uneven.”
Yet more cuts are planned. President-elect Donald Trump has promised to cut the US rate from 35 to 15 per cent.
Australian Prime Minister Malcolm Turnbull wants to go from 30 to 25 per cent over the next 10 years. And in November, British Prime Minister Theresa May said she wants the UK to have the lowest rate of the world’s top 20 economies, which some interpreted as sub-15 per cent.
Corporate tax has been a hot topic in Australia since the Tax Office revealed last week that more than a third of large entities paid no tax in the 2013-14 financial year, despite millions of dollars in earnings.
Dr Ting’s warning was echoed this week by the Oxfam charity, which said the “beggar thy neighbour” tactic of competitive tax cuts pits the world’s economies against each other, with corporations and their wealthy shareholders and owners the only winners.
“Left unchecked, it is quite possible that this could lead to the effective end of corporate taxation in our lifetimes, which will have a huge impact on inequality and the fight against poverty,” Oxfam chief economist Muheed Jamaldeen wrote in the report.
The charity blamed the trend on neo-liberal economics and on significant lobbying from vested interests.
“To reverse the race to the bottom in corporate taxation, governments must reject these outdated and flawed assumptions that are based on an unproven economic worldview. They must also put an end to the capture of tax policy making by private vested interests that work against the public interest.”
As noted by Dr Ting, the main argument for these widespread cuts is that they will attract foreign investment, thereby boosting economic growth.
Modelling by Treasury of the Turnbull government’s proposed cuts supported this view. It predicted increased business investment, and at best a 0.4 per cent increase to employment.
Even these projections were criticised by some as overly optimistic.
University of Melbourne economist John Freebairn also argued that the mathematical models used by Treasury and others cannot “confidently” measure the impacts of corporate tax cuts.
Research by the OECD has shown that other factors are more important when companies are deciding where to invest. Firms care more about the education level of the local workforce and whether the country has a well-functioning legal system and well-developed infrastructure, the report found.
Labor’s shadow finance minister Dr Jim Chalmers made a similar point this week, telling ABC radio that corporate tax is “just one of the factors” that attracts foreign businesses.
“There are a whole range of other things as well and I think the government’s kidding itself if it thinks that if it takes a couple of points off Australia’s corporate tax rate that there’ll be some sort of flood of investment. It’s a much broader set of considerations that come into play,” Dr Chalmers said.
The Turnbull government maintains that cutting corporate tax will boost jobs and economic growth.