Economic benefits of company tax cuts are real – and underestimated

So most, if not all, US companies do feel the impact of Australian tax rates. They can postpone, almost indefinitely, the US tax offset by ensuring that Australian income is not repatriated to the US, and when they do repatriate, the offset is often not one-for-one.

Hence, the Henry Tax Review was fairly dismissive of this issue, as was a discussion in the New Zealand context by tax academic George Zodrow.

As noted earlier, the costs of a company tax cut are partly returned through higher economic growth. This fiscal dividend is also increased if the tax cut results in less tax avoidance, a likely result given the (allegedly massive) avoidance of US multinationals.

Modelling by Independent Economics has most of the fiscal dividend of a company tax cut coming from reduced tax avoidance. If this result is seen as implausible, then look to Treasury modelling: they have most of the fiscal dividend coming from growth and less than 30% (probably much less) coming from reduced tax avoidance.

Based on this Treasury modelling, the cost of the tax cut, net of the fiscal dividend, is $4.2 billion. The modelled increase in national income is about $11 billion: a benefit that is more than 2.6 times the cost. The modelled increase in GDP is $18.1 billion, more than 4.3 times the cost. Clearly a beneficial investment, particularly given that the modelling results are likely to be underestimates as argued earlier.

On this basis, a company tax cut is a particularly valuable policy for Australia’s economy — and should remain a priority.