The magic pudding, vested interests and company tax cuts

The Magic Pudding is children’s fiction, but its concept of self-replenishment is a fact when it comes to looking at company tax cuts.

Tax experts have clearly outlined that cuts in the company rate will substantially finance themselves.

Their argument is sound: company tax reductions will lead to more investment, causing wages and growth to accelerate, leading to more tax collections in the longer term.

Treasury states in a paper released with the Budget that every dollar in company tax results in 45 cents being recouped due to higher growth and incomes. Separately, Independent Economics argues that 55% of a company tax cut is self-financing and therefore the costs of cutting company tax to 25% is much lower than Treasury’s estimate of $48 billion over 10 years.

If you remove  the self-financing aspect, the estimated increase in GDP over the same 10 years is still around $160bn, generating a particularly good return for spending $48 billion — and the self-financing estimates would make this return even better. Similarly, the reports from Treasury and Independent Economics argue that wages, investment and employment will also be higher with a company tax cut.

There has been criticism that the benefits of the company tax cut will take decades to eventuate, while the costs occur now. But this applies to any investment by any business or government.

For example, the ALP’s proposed increased spending on schools will take decades to provide a benefit. If the argument is solid enough for education, it is equally solid for company tax — more so, as it is suggested that the full benefit of school financing will not be reached before 2095. Even the most pessimistic estimates are that the benefits of the company tax cut are reached well before then.

Another criticism has been made that business advocates of company tax cuts are ‘self–serving’. But the recent public letter from 50 prominent Australians arguing against these cuts is just as much self–interested, as most of the signatories of the letter rely on government spending.

But even if we dismiss arguments from the business advocates and the opponents of tax cuts as being self–interest, we are left with the statements of several government and quasi-government bodies that support the case for company tax cuts.

Similar views to those of Treasury were expressed in the Mirrlees Tax Review in the UK. In addition, the OECD, a quasi-government body, has argued that company taxes are the most harmful for growth, and more harmful than personal tax, GST or taxes on property.

OECD data also clearly shows that Australia’s company tax rate, and company tax revenue, are well above the OECD average. This further supports the case for lower taxes on companies, a point conveniently ignored in the public letter, which focussed on international comparisons but conveniently forgot that Australia’s company tax rate, and revenue, is especially high compared to the rest of the world.

The measure everyone uses to compare revenue across countries is the tax to GDP ratio. And it is strange that The Australia Institute has criticised the use of this ratio, particularly as the organisation has previously used this ratio — including in its web page “Is Australia a high tax country?” and report It’s the revenue stupid: Ideas for a brighter budget.

That report claims we should hike our tax to GDP ratio to match the levels of the mining boom (an argument put more recently by CEDA). However, our economy could not support the tax levels from the mining boom, especially with today’s weaker wages growth and investment levels — and national income shrinking rather than growing very strongly as it was in the boom. In fact, making more reasonable historical comparisons, our overall tax levels are at or around average, and forecast to go well above this average.

You might of course also dismiss these arguments as self-serving. But the international data, and statements of Treasury, OECD and independent reviews in favour of tax reductions, can’t be so readily dismissed.

The scepticism about self-financing is not warranted, given this forms the core of most arguments about government (and business) investment: a short term cost for a longer term gain. And on this basis, the case for company tax reductions remains — and remains a priority.

Michael Potter is Research Fellow in the Economics Program at the Centre for Independent Studies