Serial attacks on tax cuts

Michael Potter

17 February 2017 | Ideas@TheCentre

MP business 1Company tax reductions are under constant attack, often caught up in the standard belief of the left that big business is bad. The latest argument is that the largest 15 Australian businesses will receive one third of the ‘benefit’ of the tax cut, and these companies are unlikely to increase investment in response.

However, it is wrong to use the market strength of those 15 companies to argue against reducing company tax.  A proper analysis of the data provides significant support for the cut.

First, the report claims big businesses aren’t investing,  a statement with some foundation: overall business investment levels are plummeting. But this is an argument in favour of — not against — the tax cut; big business may be avoiding investment because the tax on investment is too high.

Second, several studies argue the harmful effect of corporate tax is actually larger, not smaller, when business has market power, and the adverse effect on wages is larger.

Third, the report makes a substantial error in calculating this supposed benefit, because it fails to account for imputation, which completely offsets company tax cuts on distributed profits (dividends). This slashes the report’s estimated ‘benefit’ from $6.7bn to $2.2bn, if large businesses continue current payout ratios of 67%, as the tax cut only affects retained profits. This adjustment would be consistent with previous arguments by the same author that analysis of company tax should incorporate imputation. In any case, this supposed benefit is ephemeral: the tax cut is phased in so that many business assets bought at the higher tax rate will be mostly depreciated by the time the lower tax rate is in place.

Finally, the increasing reliance of tax revenue on a small number of large businesses is actually exposing the government to increasing risks. For example, BHP’s tax payments plummeted by $2.2 billion over one year (2013–14 to 2014–15) with the end of the mining boom. Australia is also more exposed to the possible risk of big businesses moving offshore, something that has been happening in the US.

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