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The case for company tax cuts

By Michael Potter - posted Thursday, 19 May 2016


Another day, another argument that taxes should be higher.

This time, it is the Age arguing that the case for company tax cuts is weak.

First, the article oddly states that the costs of the tax cut are being “scarcely talked about”. Yet we had a big debate last week about those very costs. It took a day or three, but Treasury eventually revealed that the costs would be $48.2 billion over the next 10 years. The number is hidden in full view, you might say.

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Second, the article notes that these tax cuts will have to be funded from somewhere, and it isn’t easy to find these funds. If spending can’t be cut, then other taxes will have to increase. This point is undoubtedly true, but it could equally apply to any and all government decisions to reduce taxes or increase spending. And here lies a significant inconsistency in those criticising tax cuts: they are all too ready to complain about how tax cuts will be funded, but where are the concerns raised about the funding of spending increases?

In particular, I haven’t seen many complaints from tax cut opponents about the funding for increased education spending (aka Gonski). It will be funded from somewhere, but where is the criticism that it will likely be from tax increases? If company tax cuts can be criticised on the basis that they mean other taxes will increase, then surely the same criticism can be made about Gonski.

Of course, we might argue that tax cuts should come from spending restraint, but that is a separate issue.

Third, the article doesn’t really mention the partial self funding of company tax cuts: the cuts lead to increased investment, which in turn result in the economy being larger; and a larger economy means more taxes are paid to the government. Treasury argues that 45% of the costs of a company cut are recouped in higher revenue; while Chris Murphy estimates the self-financing to be 55%. This substantially trims the cost estimates.

Which brings us to the benefits of tax cuts. The article suggests these benefits will be limited, based on a solitary report by Janine Dixon that argues a company tax cut will result in a decline in national income, because too much of the benefit goes to foreigners. However, there have been several detailed rebuttals of this position: one by Chris Murphy and another by Brendan Rynne of KPMG. In summary, Dixon’s model omits several benefits of a company tax cut, uses unusual parameters, and has some intermediate results that don’t seem right.

Dixon’s results are an outlier in contrast to the results of others, including Chris Murphy, KPMG, and (most importantly) the Federal Treasury who found substantial benefits of the tax cut. But The Age focusses on the one result showing the opposite.

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Next, the article raises the issue of windfall gains to shareholders from a tax cut. If windfall gains are seen as a problem, this is only a real issue for sudden large tax cuts, not for cuts that are phased in as the government proposes. Capital invested at the higher tax rate will be depreciated by the time the full cut is implemented, meaning that the windfall gain to existing capital owners will be limited.

I’m not convinced that the company tax cuts need to be phased in as slowly as proposed, but that’s also another issue.

The article then makes the somewhat odd statement that wage increases aren’t good for local businesses who have to pay higher wages. But wages will only go up (in this type of modelling) because the productivity of workers goes up. It is hard to see how businesses are disadvantaged by paying higher wages to more productive workers.

And the article ends with a contradiction. Wayne Swan’s proposal to cut company taxes was at least partly funded by companies; the article argues Turnbull’s tax cuts aren’t. And then the very next sentence The Age notes that the government is cracking down on tax avoidance, missing that these anti-avoidance measures are partly funding the company tax cut. So both the Turnbull and Swan company tax cuts were partly funded from companies themselves. We might debate the merits of this funding approach, but Turnbull’s use of it can’t be ignored.

So the case for company tax cuts is not weak: the best analysis of the evidence shows the benefits are substantial, the costs are smaller than expected, and so the cuts should be a priority.

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This article was first published in the Australian Financial Review.



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About the Author

Michael Potter is an economist and public policy commentator and authored the papers Fix it or Fail: Why we must cut company tax now and The looming crisis in business investment for the Centre for Independent Studies.

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