Recently, economists writing on behalf of business organisations, such as Jeff Bennett and Tony Makin claim that ‘Australia’s internationally uncompetitive company tax rate deters investment, both domestic and foreign. This adversely affects productivity, employment and wage growth.’ Not so!
Investment, like any other economic decision, depends on fundamentals. Since subsidies to renewables, etc., have helped to more than double the cost of baseload power and make much of our manufacturing capacity uncompetitive, it is not surprising that investment outside mining has declined. Surprisingly, what might appear to be beneficial, namely a balance of payments surplus for essentially the first time in history, does indicate a decline in foreign investment.
Like our big (foreign) business lobby, President Trump listened to self-interested pleading based on international league tables of corporate tax rates to reduce the US rate from 35 per cent to 21 per cent, a massive fall. Perhaps the most serious of the few mistakes that Trump has made as he used fracking to fast-track the economy prior to Covid. There was no increase in investment and a 21 per cent fall in corporate tax receipts since 2017 together with a projected additional $US1.9 trillion increase in the deficit over the next ten years. This must surely become a huge burden on personal taxpayers.
The authors’ claim that Australia’s corporate tax rate is the third highest in the OECD. But this is apples and oranges. No Australian taxpayer involuntarily pays corporate tax. It is rebated to taxpayers via franking credit entitlements. Insofar as taxed earnings are paid out as dividends, the entire tax collected on Australian investments is rebated to Australian taxpayers.
In case I am accused of hiding my involvement, I convinced the Campbell Committee to propose the abolition of the double taxation of company income and this later became our franking system under Hawke and Keating.
One of the major reasons for Prime Minster Morrison’s win at the last election was Labor’s failed attempt to remove franking credit entitlements to pensioners and low-income earners. While it is true that some companies delay payout of earnings, perhaps because our personal tax regime for high-income earners is excessive, this is but a postponement. Treasury maintains the fiction that corporate tax cuts to Australians are costly to consolidated revenue by not considering the offsetting reduction in franking credits. Even a study cited by the authors, of the effects of corporate tax cuts to small businesses in 2015, found an almost negligible increase in investment and no alteration in wages as nearly all the gains were offset by loss of franking credits.
It is true that, in order to safeguard our tax base and prevent a huge burden falling on individual taxpayers, foreign investors do not receive franking credits. Potentially tax cuts targeted at foreign investors, i.e. large companies, could potentially increase investment but this seems extremely unlikely.
Evidence I present in a recent Economic Record article and to the Senate shows that franking credits are fully priced with domestic investors, i.e., superfunds, not foreigners, being the marginal investors. Compulsory super, together with the ability of banks to borrow cheaply overseas, explains how Australians already invests at a low cost of capital unaffected by our corporate tax rate. It is our almost unique franking credit system that makes this possible.
A tax cut for large companies will put additional billions of dollars into the pockets of foreign shareholders purely at the expense of Australian taxpayers. Hence the great lobbying effort by the Business Council and others to convince the government to capitulate.
This brazen push was defeated by the crossbenchers in the Senate several years ago, largely because no independent economists would support the gifting of billions for nothing in return. A number argued against it. Neither of these current authors participated in this great tax debate. In the post-Covid world in which we have added nearly a trillion dollars to our debt, it makes no sense at all to further raise the immense burden on the personal income taxpayer by giving away even more of our corporate cake to foreigners. A Congressional Budget Office study of US companies investing overseas found that Australia already had perhaps the lowest effective corporate tax rate in the world. It is notable that the US is our major foreign investor.
If the Australian government really wants to benefit foreigners with the least cost to Australia, then, instead of lowering the corporate tax rate as urged by Bennett and Makin, it could provide incremental benefits on new investment, as argued by Janine Dixon.
A tax cut gives the highest possible gift to all existing foreign investors, regardless of whether they invest.
The message that Bennett and Makin should present is that the government’s reaction to Covid-19 is likely to very significantly reduce future living standards. Hence, to have any chance of successfully competing in a post-Covid world, we need to get our own economic house in order.
This requires a massive investment in coal-fired power stations and gas-fired peaking stations to restore the manufacturing sector and removal of ‘green tape’ that has been used to prevent investment in new coal mines and infrastructure generally for decades.
The latest attempt by the Western Australian government to retrospectively stymie Clive Palmer’s $30 billion dollar claim is a particularly egregious example.
Industrial relations must be overhauled. We have the world’s highest minimum wage with currently effectively 3.5 million on JobKeeper unemployed.
Australia’s exceedingly high marginal tax rates need to be reduced. Both the top universities and the tourism industry could be entirely decimated by continual lockdowns and closure of international borders. Australia is the only democracy in the world to ban its citizens from leaving the country; making every Australian a prisoner in their own country.
Lockdowns must cease and borders reopened to save tens of thousands of Australian businesses and the lives of thousands that are being destroyed by the draconian Victorian lockdown. Chairman Dan Andrew’s curfew is the first to be imposed in Australia’s history, yet the Victorian government does not even pretend to provide a valid justification.
Australia’s wealth depends on being an open economy, but this is threatened by fear inspired, knee-jerk, Covid-19 policies that lack a cogent exit strategy for our long-term economic survival as a nation. So far, there is no magic bullet on the horizon, and it may never arrive. Should we look forward to decades of lockdown and border closure?
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Peter Swan AO is Professor of Finance, UNSW-Sydney
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