Productivity Commission piles in to Labor’s schizophrenic war on big business

Industry Minister Tim Ayres rightly says that Australia is in competition for global capital as he throws taxpayer money at propping up old steel mills and smelters.   

Yet, at the same time, the Productivity Commission calls for an even heavier tax burden on the big companies that drive most of the new business investment needed to revive Australia’s stalled productivity. 

And so the traditionally independent PC has joined Labor’s schizophrenic war on big business. 

Under its plan, Australia’s 500 biggest firms — those with annual revenue above $1 billion – would continue to pay the 30 per cent company tax rate that the PC agrees has become internationally uncompetitive. 

These big companies would be further hit by the ‘incentive’ of a new 5 per cent net cash flow tax that supposedly would target their excess profits and reward extra investment spending.     

This would aim to create ‘a more dynamic and resilient economy’: the PC even cites one of Jim Chalmers’ favourite economists, capitalist critic Marianna Mazzucato, in second guessing what company tax policy would be ‘implementable’ for the Albanese government.  

The PC points to a fall in both the birth rate of new firms and the death rate of old firms as evidence of weaker creative destruction. Less economic dynamism in turn means that “large parts of our economy are not working” the way they should. 

 “In many sectors a small number of big firms exercise market power to the detriment of consumers,” the PC complains. 

Its commissioned economic modelling makes the frankly unbelievable claim that 54 per cent of Australia’s company tax base takes the form of ‘economic rents’, up from 31 per cent before the pandemic. 

It’s a utopia for oligopoly capitalists, presumably led by the big miners, the big banks, the big two supermarket chains and the likes of CSL and Wesfarmers’ Bunnings.   

‘Rents’ are the economists’ label for profits above the ‘normal’ returns that would be generated by a market in which firms vigorously compete against each other. Theoretically, such excess profits could be taxed more heavily without prompting firms to cut back their investment in new capacity. 

Labor is instinctively drawn to this narrative of big companies exploiting their market power, ripping off consumers and fuelling inflation. Egged on by the Nationals, the Coalition has become even more anti big-business and populist at times. 

Treasurer Chalmers last year pointed to unbelievable claims of a “near doubling” of market concentration to justify giving the Australian Competition and Consumer Commission tougher powers to block corporate mergers. 

Anthony Albanese began this year’s election campaign promising heavy fines against “price gouging” by Woolworths and Coles: defined as when they “take the piss” against their customers.  

But it is devilishly difficult to measure ‘rents’ in any sensible way, as Sinclair Davidson explains in a new Centre for Independent Studies analysis of the PC’s proposed net cash flow tax. 

Gas exporters reasonably will seek much more than the 10-year government bond yield before risking tens of billions of dollars on the volatile global energy market and amid political hazards that could retrospectively force them to divert sales to the domestic market.  

The prime minister’s claims of supermarket price gouging came as a one-year ACCC study found no evidence of such profiteering. Australian supermarkets even increased grocery prices less than in most other developed economies. 

Until now, the PC typically dismissed attempts to blame corporate power for any dulling of economic dynamism. 

In Australia, sectors such as banking, airlines, supermarkets and cement appear dominated by a small number of big firms. But just two years ago, the PC found most industries “are not highly concentrated”.  

And oligopolists can still compete vigorously: as in what previous PC analysis has described as Australia’s “highly competitive” supermarket sector.  

Competition from mortgage brokers, global big tech payment providers and the disruptive entry of Macquarie has squeezed big bank home lending margins. 

Yes, the big iron ore exporters have been well-rewarded for taking the now-rising risk on China — but their hefty profits don’t hurt Australian consumers. 

And digital technology has left Australia more exposed than ever to global competition: start with the entry of Amazon, the decline of department stores and the smashing of traditional media. The dismantling of the tariff wall exposed car makers to so much import competition that they shut up shop here. 

And the related PC proposal to cut the company tax rate to 20 per cent for smaller companies that earn less than $1 billion in annual revenue wouldn’t offset the investment hit from taxing big companies more. 

It’s big business that mostly drives the economy’s productive capacity. The top 1 per cent of firms account for about one-half of all non-mining capital investment in Australia, according to Reserve Bank research. 

As Industry minister Ayres is discovering, globally focused big companies have the option of moving production to where tax rates, energy costs, labour regulation and other costs are less onerous than here. 

Business investment has been crowded out by the expansion of the less-productive care economy and strangled by what the PC calls the “ever growing burden of regulation”. Ironically, it is this costly red tape and compliance burden that often makes it harder for new firms to challenge more-established rivals.  

Michael Stutchbury is executive director of the Centre for Independent Studies.