Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Australian corporate tax cuts and GDP growth

By Michael Knox - posted Wednesday, 29 June 2016


Our observation is that sustained rises in the stock market are caused by sustained rises in the earnings of companies that are traded in the stock market. These earnings are by definition the after tax earnings of corporations listed in the equities market. Their earnings are therefore publicly available.

We test one of those publically available series of earnings for corporations that are traded on the Australian equities market. We compare changes in those after tax earnings to changes in Australian GDP. We find there is a strong relationship between the real after tax earnings of companies listed in the Australian equities market and real trend GDP.

The data sample we use is the three decade period from the third quarter of 1993 up to and including the first quarter of 2016. Our testing suggests the relationship between growth in after tax corporate earnings and GDP growth is very strong. The T statistic for this relationship is 3.0. This means that the chance of this estimated relationship not being a real relationship and simply being a spurious artefact of the data is only around 3 chances in 1,000.

Advertisement

Impulse Diagrams

In Chart 1, Chart 2 and Chart 3, we show a form of statistical examination called the impulse diagram. Under this procedure, we measure the change of one variable in response to a one standard error change in another variable. In Chart 1, we see that a one standard error change in real after tax corporate earnings leads to an increase in real GDP. Then in further charts we look at how this process occurs by way of increases in private investment.

In Chart 2, we see the change in real private fixed capital investment that occurs as a result of a one standard error increase in Australian real after tax corporate earnings. We can see how an increase in after tax corporate earnings leads to a gradual increase in private fixed capital investment.

In Chart 3, we see the change in employment that occurs as a result of a one standard error increase in Australian real private fixed capital investment. We can see from Chart 3 the enormously powerful and driving force that private fixed capital investment has as a source of jobs growth in the Australian economy.

These three charts drawn from the actual data of the Australian economy demonstrate that after tax corporate profits lead to private fixed capital investment. Private fixed capital investment then leads to job creation.

Conclusion

We have demonstrated that rises in after tax corporate earnings lead to rises in GDP. A cut in the company tax rate will lead to a rise in after tax corporate earnings. A cut in the corporate tax rate will then lead to a rise in GDP. This relationship can be demonstrated both theoretically and statistically.

Recently some economists have been very publicly unable to find a relationship between corporate tax cuts and growth in GDP. It took hundreds of years to discover Australia. This does not mean that Australia did not exist. It just means that it was very difficult for some people to find.

  1. Pages:
  2. 1
  3. 2
  4. Page 3
  5. All

Disclaimer

The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.

This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever



Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

5 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Michael Knox is Chief Economist and Director of Strategy at Morgans.

Other articles by this Author

All articles by Michael Knox

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Article Tools
Comment 5 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy