Finance Finance News Analysis: Watch closely Australia, you’re about to be robbed

Analysis: Watch closely Australia, you’re about to be robbed

One Nation tax cuts
Pauline Hanson had ruled out supporting the full company tax package but on Thursday backflipped. Photo: AAP
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As the Business Council and corporate Australia ramps up its campaign for a company tax cut, it’s important all voters understand the huge amount of wealth about to change hands and where it will end up.

The Business Council, in a letter that has been widely republished (see below), has promised that if the government’s tax cut package is passed by the Senate its members will “commit to invest more in Australia which will lead to employing more Australians and therefore stronger wage growth as the tax cut takes effect”.

If the Senate crossbenchers who have so far blocked the corporate tax cuts are fooled by that promise, they will have utterly failed their constituents – something Pauline Hanson, who had previously ruled out backing the cuts, has already done.

They will have assisted in an epic transfer of wealth from Australian households to the foreign investors whose money makes up around half the capital invested in the Australian share market.

While company tax cuts could be sensible policy if presented as part of a wide-ranging tax overhaul – especially one that boosted indirect taxes such as the GST and land tax – the current plan for a further $36.5 billion in cuts for the big end of town is nothing short of deception and theft.

That is because the effect of a tax cut is utterly different for local and overseas investors.

As explained recently, Australia’s dividend imputation system means that locals who hold shares in BHP, Wesfarmers, Telstra or the like are refunded any portion of the ’30 cents’ the company has paid that is over and above their highest personal tax rate.

For example, a young worker paying a top tax rate of 19 cents will receive 11 cents back via the ‘franking credits’ system at tax time.

Retirees aged over 60, who are living on a tax-free income, receive the entire 30 cents per dividend – which would reduce to 25 cents per dividend if the tax cut package is passed.

Overseas, the situation is completely different. Franking credits are not available to foreign investors, so the 30 cents the company has paid on their behalf is not refunded.

If the rate of tax they pay fell from 30 cents to 25 cents, they would pocket the difference – and over 10 years, that windfall would account for nearly all of the remaining $36.5 billion in tax cuts that One Nation, Derryn Hinch and the other crossbenchers are now considering passing.

For the poor schmuck taxpayer in Australia, who has been promised “more” trickle-down economics in the above letter, there are only two possible outcomes.

Either services Australians rely on – Medicare, the NDIS, defence spending, tertiary education, roads and infrastructure – will be funded by tens of billions less than would otherwise be the case.

Or, other categories of tax – particularly income tax which rises automatically each year via bracket creep – will be raised to cover the expanding budget costs locked-in by Australia’s ageing population.

Voters already know that recurrent spending is growing too quickly for current tax revenues to cover.

Those who read the financial press will also be aware the ‘assumptions’ built into the federal budget are too rosy to make a ‘return to surplus’ anything more than a vague hope.

So why would Australian households want to hand tens of billions of dollars to overseas investors, and lock themselves into paying higher levels of tax just to keep services at something like their current levels?

Oh yes, because a group of corporate directors have made the meaningless promise – taken seriously by many journalists who should know better – to “invest more” in the country and, one day, to put upward pressure on our flat-lining wages.

What an appalling deception.

The only way the tax cut will ‘boost investment’ is by encouraging overseas investors to bid up the share prices of Australia listed corporations, and even then not by much.

Higher share prices do lower the cost of raising equity capital for those companies – and yes, that can make marginal projects, such as low-grade mines, or non-prime agriculture, viable.

But all of their other costs remain the same – wages, plant and equipment, land and building costs, debt funding and so on.

In essence, the inward flow of investment will be little changed.

However, for the overseas part-owners of corporate Australia, the windfall profits will be massive.

Watch closely Australia, because all the signs are that you’re about to be robbed.

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