The Heresy Of The Gospel Of Low Taxes
By Mike SeccombeAugust 8, 2013
Tony Abbott’s pitch promises that Australians at large will benefit from a cut in the corporate tax. Is that fair dinkum?
Day four of the federal election campaign and Tony Abbott was at a Toyota dealership in Launceston, Tasmania, preaching the gospel of low taxes.
It’s a very simple dogma, to wit: “…lower taxes means more prosperity, means less pressure on your cost of living and it means more secure jobs.”
Abbott talked about several taxes, but let’s just focus on one today: his promise that a Coalition government will lower the corporate tax rate by 1.5 percentage points, to 28.5 per cent, from July 1, 2015.
Preached Abbott: “The company tax comes down and that is all about creating a better climate for investment and jobs. As Julia Gillard said at the beginning of last year, ‘If you are against cutting the company tax, you are against jobs’.”
Now, leaving aside the oddity of Abbott’s reliance on the authority of the former Prime Minister whom he blames for mishandling the economy, it’s not quite that simple.
Let’s leave aside also the question of the Opposition’s costing of that promise; other, highly numerate, people have already suggested the Opposition’s figuring is more rubbery than a tyre factory.
No, I just want to go to the basic question of how beneficial corporate tax cuts really are for those of us who are not corporations.
Let me illustrate my concern by reference to a real-life, albeit extreme experiment in corporate tax cutting, carried out in the United States in 2004, when Republicans controlled both houses of Congress, and George W. Bush was President.
At that time, US corporations were sitting on hundreds of billions of dollars in offshore tax havens, which they refused to repatriate at the US corporate tax rate of 35 per cent.
They lobbied the Republicans to offer them a tax holiday to bring the money home. They argued, just as Abbott did in Launceston, that the foregone tax revenue would be more than compensated for by the stimulus the money would provide: the creation of huge numbers of jobs, increased spending on research and development, et cetera.
And they got their tax holiday. In all, 843 companies brought back USD $312 billion, at a concessional rate of 5.25 per cent.
Ah, but the promised benefits did not flow, as a Senate subcommittee report later showed. The report looked at the financials of the 15 largest repatriators of funds, and found that they used the money to repurchase stock, pay dividends and increase executive pay.
With only two exceptions, they did not increase R&D spending or employ more workers; indeed, the top 15 corporations, which between them brought back about $150 billion, subsequently cut their workforces by an aggregate of 20,000 people.
Another examination of the effects of the tax holiday, carried out by the non-partisan Joint Congressional Committee on Taxation, estimated the cost to government revenue of this failed experiment at $3.3 billion.
What’s more, the corporate sector then increased the rate at which it stockpiled money offshore, apparently in anticipation of the next tax holiday. The Taxation Committee came down strongly against repeating the exercise in 2011, estimating that it would cost the taxpayer $78.7 billion. You can read a more detailed account of it all here.
Now, I’m not suggesting for a minute that Abbott’s modest proposal for a corporate tax cut (or, for that matter Gillard’s before it) will have such dramatic consequences.
I’m just saying it’s much more complicated than the Gospel of Tony would have it.
Let me point out a few of the complications. For one, companies already pay well below Australia’s statutory company tax rate of 30 per cent anyway, and have done ever since the Global Financial Crisis.
Exactly why this is the case is a bit of a mystery, but a Treasury issues paper from May this year, poetically entitled Implications of the Modern Global Economy for the Taxation of Multinational Enterprises, strongly suggests tax avoidance is involved.
The average company tax rate fell to less than 24 per cent in 2010. It has since increased slightly but “remains around 3 percentage points lower than the statutory rate” according to Treasury.
Furthermore, more than half the company tax raised came from just 0.1 per cent of companies, most of them no doubt operating internationally.
We can’t say how many of those companies are dodging tax, but, as I pointed out recently in Tax Dodgers Sans Frontières, we do know that 61 of Australia’s biggest corporations have subsidiaries in one or more “secrecy jurisdictions”, as tax havens are more properly known.
(Just as an aside, you might be interested to know that Toll Holdings, the company that picked up the tab for Opposition immigration spokesman Scott Morrison’s recent trip to Nauru, has 64 such subsidiaries. News Corp, the Opposition’s preferred propaganda organ, which was given the exclusive on the trip, has 146 such subsidiaries.)
Anyway, the point here is that given the fact that Australian companies already are paying less on average than the Coalition’s proposed 28.5 per cent tax, the cost to revenue might not be so great.
Equally, the benefit to companies might not be so great either, meaning they won’t create so many jobs.
There are other issues, too, with the promised corporate tax cut. First, Abbott’s plan is to levy extra tax of 1.5 per cent on some 3,200 of the largest companies to fund his promised paid-parental-leave scheme. So they will effectively get no tax cut, while companies just a little bit smaller do get one. Is that fair?
Second, the tax cut means taxpayers are effectively paying for Abbott’s proposed, lavish paid-parental-leave scheme, which would see new parents paid at their salary level for six months, up to a maximum salary of $150,000. This will essentially see a transfer of wealth from low-income taxpayers to high-income new parents. Is that fair?
Third, there is the fact that only about 750,000 of Australia’s 2.1 million small businesses are incorporated. Thus almost two-thirds will not benefit from the tax cut. Will this make them relatively less competitive...
You get the picture; there are lots of questions. And we’ve only touched on the economic ones.
Then there are the social questions.
The supply-side dogma which has dominated economic thinking since the late 1970s – when developed countries all around the world began competing to cut regulation and lower tax rates – may have, as Abbott said, brought more prosperity.
It has certainly brought us material advancement. It also has brought longer working hours, the necessity for households to have two incomes, vastly increased disparities in wealth, and, according to behavioural scientists, not a lot in the way of increased life satisfaction.
But you’re unlikely to hear politicians – or at least those from the major parties – talk about any of those complexities in this election campaign.
The gospel of low taxes must not be challenged.