Why It Would Be Wrong Not To Cut Company Tax

Written by:
24 April 2018
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Writing in these pages Professor Peter Swan AO has forwarded several arguments against the federal government’s proposed company tax rate changes. While he is a giant of the profession and a treasure to the nation, I hope he has made a rare error.

Professor Swan suggests the government modelling in favour of the company tax rate cuts is entirely flawed. Undoubtedly, based on past performance, this must be true. Yet there are some uncomfortable facts that mitigate against all arguments not to cut tax rates. The progressive left tend to argue that tax rates should not be cut because companies don’t pay tax due to avoidance and evasion. Professor Swan suggests foreign investors don’t pay company tax due to their harvesting of franking credits.

The MYEFO estimated company tax would raise $81 billion in 2017-18. That is a lot of revenue for a tax nobody pays.

It is true that our dividend imputation system renders Australian taxpayers indifferent to company tax rates – but it isn’t clear that foreign shareholders are indifferent to Australian taxation.

It is entirely true that in the short run the immediate beneficiaries of a company tax rate cut will be foreigners. Yet it is also clear the ultimate burden of company tax falls on Australian workers and consumers. Enriching ourselves by enriching foreigners is a business model that has worked well for a long time. We can quibble as to the magnitudes to the enrichment, but the principle remains unchanged.

Bitter experience

Professor Swan’s claim that the foregone revenue could be better spent by government than by shareholders flies in the face of bitter experience. Has he seen what Australian governments spend money on these days? I too support dumping the Paris Agreement and government building efficient base load coal-fired power stations – but that money should be borrowed. If ever there was a case for public debt that is it; certainly not dodgy submarines and foreign aid. As Adam Smith argued, government should engage in public works that are beneficial to a great society, yet not profitable. Power stations that produce cheap and reliable base load energy must meet those criteria.

He is entirely correct to point to the sovereign risks associated with a future ALP government reversing tax cuts. Even here, however, the outcome of the next election is in some doubt. The fact is the ALP economics team, while impressive on paper, is quite weak. Mistakes are already being made.

Malcolm Turnbull will not be caught out by a second Mediscare tactic and can and will pay hardball on the economy. Poor preparation in selling complex tax mix changes and large-scale economic reorganisation will be quickly exposed. Even if a Shorten government were elected, it is an open question as to whether it could legislate tax increases through the Senate.

Winning elections, while campaigning for tax increases, from opposition is difficult. That is the first challenge Labor faces. The second challenge is credibility. Both the Coalition and Labor have the same problem – they both want to campaign on personal tax cuts from a position of budget deficit. At the same time Labor promises big spending. John Howard’s 2004 campaign slogan comes to mind – who do you trust?

In the meantime we should heed Milton Friedman’s tax policy advice – cut taxes for any reason when it is possible to do so. That possibility arises when spending is under control and budget responsibility has been restored.

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