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Cut company tax and, umm, maybe boost growth

company tax cut turnbull
Existing overseas investors in Australian corporations would receive a windfall profit from a company tax cut. Photo: Getty
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Fans of the Turnbull government’s company tax cut plans are lauding a new report that appears to support the notion they will increase job creation and investment.

‘Appears’ is the operative word, as the report is quite candid about the difficulties of reaching definitive conclusions when the first stage of the cuts has been in place for such a short time.

The report, prepared by economics consultancy AlphaBeta for the Xero accounting software group, includes two kind of analysis.

The first analyses all the companies in a 69,000-strong sample with turnover less than $2 million a year – the threshold below which the 2015 tax cut of 1.5 per cent applies.

This is problematic because very small firms can behave quite differently from larger firms. As economist Janine Dixon of Victoria University’s Centre for Policy Studies puts it, “what’s true at the micro level is not true at the macro level”.

Apples and oranges

When firms of various sizes are analysed together, the report finds “employment growth, wages growth and investment growth in the first year of the tax cut (financial year 2016) are significantly higher in the treatment group (which received the tax cut) relative to the control group (which did not receive a tax cut)”.

It estimates that firms received an average additional tax refund of $2940 and of that, they kept 51 per cent to shore up cashflows, spent 19 per cent on hiring new staff, 27 per cent on additional investment and just three per cent on wage rises.

“That’s entirely consistent with the microeconomic foundations of our own company tax modelling,” says Dr Dixon, “which is that when businesses receive a tax cut, some of it is taken as extra profit, some is invested, and the investment is supported by additional employment.

“This doesn’t prove that a company tax cut for all businesses is good policy though … What we’ve seen so far is the impact of applying a tax cut to a subset of businesses, which happen to be small businesses and mostly Australian-owned.”

That last point is crucial, as ASX-listed companies are, on average, half owned by overseas investors. They would benefit directly from a company tax cut, whereas local investors, who would receive a corresponding franking credit cut, would mostly not.

A better approach

The report also includes an ‘apples with apples’ comparison of firms that are roughly the same size – in this case those with a turnover slightly above, or slightly below the $2 million threshold.

This method of analysis helps to eliminate other factors that may otherwise skew the results.

Annoyingly for the government, however, that comparison is less conclusive.

The report’s results “… suggest a statistically significant impact of the tax cut on employment. The coefficients [i.e. impact] on wages and investment are not statistically significant at established levels. Perhaps the effect of the tax cut on employment, wages and investment grows over time as suggested in much of the theoretical literature.”

Perhaps, but there is a flip-side to the tax cuts that is not so theoretical.

The revenue lost by extending the tax cut to larger corporations, which Labor estimates at $36.5 billion over 10 years, won’t be available to fund job creation in the public sector – in the expanding National Disability Insurance Scheme, or to improve teacher-to-student ratios in schools and universities or nurse-to-patient ratios in public hospitals.

Who’s creating jobs?

The AlphaBeta report is a sound attempt to turn data covering a very short time period into a firm statement about how tax cuts might lift growth.

But try as it might, it doesn’t really shed much light on what corporate Australia would do with its tax refunds, if the cuts were extended.

The big companies that keep telling us the 30 per cent tax rate is ‘uncompetitive’ are not only being disingenuous – the headline rate simply doesn’t reflect Australia’s low ‘effective’ company tax rate – but have also been creating jobs hand over fist in the background anyway.

Economist Saul Eslake tells me that the strong jobs growth seen in the past couple of years is not evenly spread across the company-size spectrum – in net terms, three-quarters of jobs growth came from companies with more than 200 employees, all of which will be well north of the $2 million threshold covered by the AlphaBeta study.

That pours even more cold water on the claim that this study proves further tax cuts are a good idea.

Not that this will matter much when it’s being waved around in the parliament or being quoted by corporate leaders.

When $36.5 billion is involved, it’s easy for cautiously stated findings to suddenly become rock-solid facts.

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