Current Australian Tax Cut Debate A Tale Of Two Populisms

Written by:
3 July 2018
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Since 2007-8 – the last time Australia enjoyed a budget surplus and zero net public debt – government spending has increased by 78 per cent. Spending now makes up 25.4 per cent of GDP. By contrast, government revenue has increased by 61 per cent and makes up 24.9 per cent of GDP. For those of us who thought John Howard ran a big-taxing, big-spending-government things have got much worse.

Over the same period the consumer price index is up 30 per cent, gross domestic product by 69 per cent, and GDP per capita just 41 per cent. So it isn’t clear all that spending has added much value to the community.

On a positive note, the Turnbull government has legislated personal tax cuts that phase in over several years. Better than nothing; but the perverse incentive effects associated with the slow phase-in suggest that the benefits of those cuts may be obscured. That brings us the on-again, off-again and currently off-again company tax cuts.

Unlike most other OECD economies, Australia collects a lot of company tax and public spending is reliant on that revenue. That suggests that debates around company tax should be focused on the economic and fiscal impact of tax changes. Unfortunately that debate is somewhat lacking at the moment.

The debate surrounding company tax rates can be thought of as being a tale of two populisms. One form of populism, following Donald Trump, is to cut company tax rates despite budgetary impacts. While the other, following Jeremy Corbyn, is to punish business and not cut tax rates despite economic consequences.

As we saw late last week, there is less appetite for the Corbyn position than Labor Leader Bill Shorten had thought. Shorten had to back-flip on a promise – passed by the ALP expenditure review committee but not discussed by the shadow cabinet, although presumably the same people – to repeal existing company tax cuts that had already been legislated.

Weak and irresponsible
The Corbyn form of populism is weak and irresponsible. Business is not a conscious monolith with its own agenda. Rather “business” is an institutional mechanism whereby people pursue their economic interests. To argue that “business” has lost its social licence to operate is to attack the economic interests of people. To refuse a business tax cut is to refuse people the opportunity to better themselves and earn a living.

While the Turnbull government hasn’t quite fallen for Trump-style populism it has got itself into a muddle. It understands the need to lower taxes, yet has introduced new taxes under the guise of “integrity measures” in order to raise revenue. Those new taxes explicitly target the beneficiaries of a company tax cut. It is not clear how random attacks on banks, multinationals and technology companies will benefit the Australian economy.

In 2010 the Rudd government proposed cutting the company tax rate from 30 per cent to 28 per cent in two steps. The rationale was to grow the economy, attract investment and increase after-tax real wages. It is difficult to understand why Wayne Swan now argues against the very policy he championed in office. That was after the Henry Tax Review had proposed lowering the rate to 25 per cent. Lowering the rate to 25 per cent – again over a long time-frame – is the current government policy. Again the perverse timing incentive effects are likely to obscure any economic benefits.

The logic for cutting company tax is much the same now as it was then. As Bill Clinton said, “It’s the economy, stupid”. Or as Warren Mundine wrote in these pages, business tax cuts will either result in more plant and equipment being bought or wages being paid.

The current distinction between taxing large and small businesses at different rates seems to be very arbitrary. This is especially the case when income is taxed at personal marginal tax rates as it is under the dividend imputation system. Australian resident taxpayers should be indifferent to the company tax rate. To argue that tax cuts reward the top end of town is to misunderstand how the tax system works.

What high company tax does do, however, is provide disincentives to investment that ultimately reduce the level of employment and wages within an economy.

In addition to the economy stupid, we should always keep it simple stupid. At the same time as the government has simplified the personal tax system by eliminating an entire tax bracket, we may end up with a tiered company system where large and small companies pay different rates. This creates disincentives to expansion and adds complexity to the tax system. The Turnbull government certainly didn’t help its case when it introduced the ill-conceived bank levy. The “logic” of that tax is now being thrown back in its face.

The purpose of the tax system is to raise finance for the provision of public goods while inflicting as little economic cost on the community as possible. Unfortunately the debate so far has been about either rewarding political friends or punishing political enemies. A strong, vibrant economy is the one thing that we should be able to agree on – that means a comprehensive and honest debate about company tax is something we should welcome.

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