Prime Minister Malcolm Turnbull is taking a huge risk by persisting with corporate tax cuts, with the blow to revenue certain but the benefits murky, experts have warned.
Mr Turnbull devoted a sizeable chunk of his National Press Club address on Wednesday to extolling the benefits of the cuts, which will be put to Parliament in March.
He claimed that cutting the corporate rate from 30 to 25 per cent over the next 10 years would not only attract foreign investment and prevent offshoring of jobs, but make every full-time worker better off.
“If we had a 25 per cent business tax rate today, full-time workers on average weekly earnings would have an extra $750 in their pockets each and every year,” he said.
The speech was as much a pitch to the Senate crossbench as it was to the average Australian, since it faces defeat in the upper house.
The problem for Mr Turnbull is that it is nowhere near certain the cut will deliver what he promises, while his own figures predict it will rip a billion-dollar hole in the government’s already threadbare revenue.
The modelling relied on by the government, calculated by Dr Chris Murphy at ANU, predicts a reduction in corporate tax from 30 to 25 per cent would reduce revenue by $3.7 billion a year. This assumes the full annual cost of $11.3 billion will be largely offset by an array of revenue-boosting benefits.
Mr Turnbull described the proposal, the cornerstone of last year’s budget, as a “straightforward proposition” and “not rocket science”.
But it is rocket science – or at least, very complex tax law.
His main argument was that lower corporate tax would attract foreign investment.
But to assume this requires complex modelling of international tax law – something the government has not released.
It requires an examination of the difference in tax treatment of portfolio (pension funds, insurance companies, etc) versus direct investment in the foreign investor’s home country. It also requires speculation as to how global tax laws will change in future.
John Taylor, a tax law expert at the University of New South Wales, warned that the Chinese and US foreign tax credit systems for direct investment are likely to send a big chunk of the cut straight to their government coffers, not their private companies.
“If our corporate tax goes lower, then unless theirs goes lower as well all you’re doing is giving a present to the foreign treasury,” Dr Taylor told The New Daily.
“Is there a lot of thinking about what the overall policy settings are? I don’t see it happening.
“It’s an element of ‘me too-ism’. Other countries in our region have lower corporate rates, so why shouldn’t we? If the US goes to 15 per cent, what do we do? But if you keep doing that, you end up with no corporate tax at all.”
New Zealand realised that foreign treasuries reap the benefits of corporate tax cuts and adjusted its laws to prevent this. The Australian government is not proposing to do the same.
Another curveball for Mr Turnbull is the fact that many foreign companies operating in Australia are highly leveraged. They borrow from subsidiary companies registered in low-tax jurisdictions and then use the interest payments to reduce their Australian-based profits (within ATO-imposed limits).
Further complicating the issue is Australia’s generous dividend imputation system – very rare in the world.
The system neutralises the benefits of corporate tax cuts for domestic companies, according to Dr Kevin Davis at the Australian Centre for Financial Studies.
“Our imputation system means that effectively the corporate tax rate doesn’t matter much to Australian companies because it gets washed out through imputation credits, whereas for foreign companies that’s not the case,” Dr Davis told The New Daily.
As for whether a cut will attract foreign capital, the academic said the literature is unclear. “It’s not obvious we’re not getting enough foreign capital, and lots of them don’t seem to pay tax anyway.”
And finally, even if Mr Turnbull is proved correct, any surge in foreign investment could drive up the Australian dollar, crippling important export industries.
The benefits look very murky indeed. And that’s without even looking at Mr Turnbull’s dubious claim that cutting corporate tax will stop Australian companies going overseas.
There is broad agreement among economists that corporate tax is fairly inefficient. But they also agree that income tax is even less efficient.
If the government is forced to lift income tax to fill the billion-dollar revenue hole then that is bad policy, according to Industry Super Australia chief economist Stephen Anthony.
“If you’re going to introduce an unfunded tax cut – which this is – then what you’re saying is, you’re going to use other revenue heads to pick up the gap,” Dr Anthony told The New Daily.
“In terms of economic efficiency, there is a very weak case for this tax reform. In fact, you wouldn’t even call it ‘reform’. You’d call it microeconomic distortion.”
Dr Anthony advised the government to embark on nation-wide tax reform with the states to prevent this distortion. “The government really can’t do this on its own.”
Opposition Leader Bill Shorten told journalists on Wednesday the corporate tax cut was “one of the worst ideas” given the current economic climate.
His shadow treasurer, Chris Bowen, said it would further imperil Australia’s AAA credit rating, and thus “could smash family budgets by putting up mortgage payments by $720 a year”.
The latest Essential Research poll shows just 6 per cent of Australians think large companies pay too much tax, while only about a third (37 per cent) thought small business was overly taxed.
The survey also found that 60 per cent of respondents, including more than half of Coalition voters, think making big multinational corporations pay more tax would be good for the economy because it would increase government revenue.