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<p>Morne de Klerk/Getty Images</p>

Morne de Klerk/Getty Images

The Heresy Of The Gospel Of Low Taxes

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.

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.

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.

Second, the tax cut means taxpayers are effectively paying for Abbott’s proposed, lavish paid-parental-leave scheme. This will essentially see a transfer of wealth from low-income taxpayers to high-income new parents.

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.

13 comments on this story
by chris

Mike your anti business attitude comes through loud and clear? Who's going to provide all the future jobs? The APS? I must admit they've done pretty well in their growth rates under Labor. You've highlighted News Corp too in your table. What a surprise!

As someone who resides in Hong Kong let me make clear it is not a tax haven. It just has a lower tax rate than Australia. It could also be called competitive advantage. If an Australian Corporation does business in Asia why shouldn't they keep some of their funds there/here?

August 8, 2013 @ 8:41pm
by Stephen H

Most of the world knows that trickle-down economics is bankrupt. It has never actually worked the way its proponents claim, and is simply a way to help the rich get richer. The poor get the picture. You wouldn't read about it. One unjust, ridiculous steal.

I'm sure Rupert is expecting more than just a tax break out of his investment.

August 8, 2013 @ 10:09pm
by orangefox

You write the failed experiment cost $3.3 billion in lost revenue. Are you sure this is correct and not meant to be more?
The LNP's paid parental leave scheme is in my opinion a bribe to small business and is vulnerable to being rorted.
Consider small business owners employing their pregnant relatives or friends on high wages and then being able to claim the paid parental leave scheme with the tax payer footing the bill.

August 8, 2013 @ 10:11pm
by Liam

"Gulling The Gullible R Us" is the game and practice of the current Liberal Party. The Party for naked sectional interests. If we had an honest media they would be laughed out of town clowns and shysters that they are.

August 9, 2013 @ 1:38am
by Thomas

Clowns and shysters? I suppose our view of matters is always coloured by where we stand in the economy. Let's just say that country towns and rural businesses are not exactly booming at the moment, due in large part to new taxes and costs imposed in the last three years. So we have quite a different take on who the clowns and shysters are.

August 9, 2013 @ 3:46pm
by Michael leslie

Yes, they are pathetic. The bulk of our population (well, about 50% as the opinion polls would lead us to believe) are gullible - totally gullible. Unfortunately that 50% of the nation will not read this article so it will not make a gram of difference to the election result (sorry about that). This nation is slipping into an abyss.

August 9, 2013 @ 6:02pm
by Richard Ure

@Chris Can you explain why a company receiving a tax cut will necessarily start placing job advertisements on line or in the paper? Does it not depend more on actually having more work for these workers? And if the demand were there, wouldn’t the company hire more workers anyway? Why would the companies just keep the higher after tax profit or pay an increased dividend?

August 9, 2013 @ 7:04pm
by Poor fellow my country

Yes, orangefox - Abbott's PPL scheme is an obvious rort waiting to happen - apart from being so inequitable when compared with the Government's scheme.
And now Tony has the gall to rabbit on again about 'pink batts'; I am a pensioner, I love my roof insulation, you cannot blame the federal government for small business rorts and poor workplace safety practices; ,,,

August 10, 2013 @ 10:25am
by James Trevelyan

Suggesting that supply-side economics has brought the necessity for two incomes, longer working hours etc. is not supported by any evidence. There are many other influences, not the least of which is necessarily tighter regulation (and extra effort, costs, etc.) to protect our environment. Rising material expectations is another: few aspired to McMansions in the 1970s. To blame it all on a simplified view of economics is misleading, and reinforces myths and mis-understandings. This newspaper can do better.

August 10, 2013 @ 3:07pm
by Sandra Hey

Thank you Mike for a well construction article, unfortunately this message does not reach the masses who in the end through ignorance, vote for the so called promises that do not materialise under Conservative Governments. Why is Education so important, Lee Yuan Yew knew the answer. Sadly Australia will become a lost cause, so we either leave the Country or
start to batten down the hatch for a lesser standard of living and hope we do not end up like other countries who could not manage Globalization and the Mining Companies.

August 10, 2013 @ 5:52pm
Show previous 10 comments
by Susan E

The Australian public really needs to know about this information, Mike. Sadly, most of the media are unlikely to pick up the story.

Can you perhaps get on ABC's The Drum this week to talk about the issue?

August 12, 2013 @ 12:33pm
by palidownunder

Good article Mike. Can you please write an article on tax reform and the damage negative gearing has done?

August 13, 2013 @ 11:03pm
by orangefox

'The failed experiment cost $3.3 billion' is correct. Sorry for questioning the accuracy of your article.
On a different issue, the LNP see every small business in Australia as an agent for the Liberals. They know that small businesses talk to their customers and it's a great way to influence their customers thinking. All the Libs need to do is offer a good deal or perks to small business owners and they have them on side. And since the tax payer foots the bill it won't cost them a cent.

August 15, 2013 @ 12:28pm
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