The government has got itself into a terrible position on company tax cuts – one of the key planks of its reform agenda.
Both Prime Minister Malcolm Turnbull, at Friday’s Council of Australian Governments meeting, and Finance Minister Mathias Cormann on ABC radio on Tuesday restated their absolute commitment to reducing tax rates for companies with turnovers above $50 million from 30 per cent to 25 per cent.
That’s a problem because economists, and key crossbenchers needed to pass the reform, continue to pour scorn on the measure.
For starters, corporate Australia is not paying 30 cents in the dollar on its profits, due to Australia’s hugely generous tax write-offs and investment depreciation schedules.
As reported recently, the reality is that the ‘effective’ tax rate for Australian companies is well below US company taxes, even after President Donald Trump slashed the headline rate from 35 to 21 per cent.
According to an international comparison prepared by the US Congressional Budget Office, Australia’s effective company tax rate is 10.4 per cent compared to the US effective rate (pre cuts) of 18.6 per cent.
The Trump tax cuts simplified and removed many existing tax write-offs, meaning whatever the new effective tax, it is still not as generous as Australia’s.
Some Australian companies pay more than that 10.4 per cent average, of course, which leads to the second major objection to the tax cuts – just what such a company would do with the extra money.
For once, One Nation leader Pauline Hanson has got her economic ideas straight on this matter.
She correctly points out that a company’s tax windfall cannot be given to both shareholders and workers – that is, Treasurer Scott Morrison’s claim that the tax cut will boost wages is just plain wrong.
Economist and former Liberal Party leader John Hewson told me on Tuesday that in the current environment, he has no doubts about where that money would flow at a time when “corporate profits are at an all time high relative to GDP”.
“If you help them increase that profit even more, that is give them higher net profits, they will distribute it as dividends or buy back their own shares,” he said.
“They won’t hand it out as pay rises because [while underemployment persists] they are not competing for labour.”
The third reason the cuts are misguided is that the Australian economy is most in trouble on the consumption side, as economist and former Labor trade minister Craig Emerson pointed out in Tuesday’s Financial Review.
He argued that Australia’s record stock of mortgage debt is going to drain household budgets, even if the RBA does not raise rates, due to the one-third of mortgage funding sourced on global ‘wholesale’ markets – where rates are rising.
That, he says, will find households caught between “insipid wages growth” and “rising costs of their outstanding debt, [meaning] they inevitably will pull back on spending on other items”.
That is where the government ought to focus its tax reforms – at household level.
Companies won’t raise wages while there is still slack in the labour market, nor will they increase investment just because of the planned company tax cuts.
That pretty much leaves one place to cut taxes, says Mr Hewson: “If you want to ease the cost of living pressure you can try to decrease the cost of things like childcare or power bills, or you can cut personal income tax – that would do a lot more to stimulate the economy.”
That is why the PM’s renewed commitment to corporate tax cuts is such a mistake.
The economy is going to need stimulus on the consumption side, but any income tax cuts the government makes in the next budget will be small – simply because so much revenue is earmarked to be handed back to companies.
That gives Labor a free kick. It is opposing all tax cuts above the $50 million turnover threshold, and may even reduce that threshold in the tax plan it takes to the next election.
Even if Labor commits to the same budget repair strategy as the Turnbull government, it will have billions up its sleeve to spend on personal income tax cuts – billions the Turnbull government will be trying to deliver to the part of the economy that needs it least.