Revenue more important than tax cuts for business, government and society

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Opinion

Revenue more important than tax cuts for business, government and society

By Ben Oquist

This week saw something of a breakthrough in the company tax debate. Business itself started
to reject the tax cut. Leading policy makers and economists came forward to put the case that
we need to be raising more revenue, not slashing it. And then, the Banking Royal Commission
put a huge spotlight on the major beneficiaries of such a large corporate tax reduction.

To date the discussion surrounding the federal government’s proposed big business tax cut
legislation has been one dimensional. Throughout the debate, the public have been subjected to
a barrage of claims repeated ad nauseam, despite those claims being discredited by the
economic evidence both here and overseas.

Treasurer Scott Morrison wants to cut corporate tax to 25 per cent, but the move is opposed by Labor and the Greens.

Treasurer Scott Morrison wants to cut corporate tax to 25 per cent, but the move is opposed by Labor and the Greens.Credit: Alex Ellinghausen

The central and most nonsensical argument in support of the government’s company tax
legislation is that billions of dollars can be ripped out of revenue without driving up the deficit,
raising other taxes or making major cuts to services.

"Opportunity cost" is not a new, radical or complicated economic concept. It should be central in
the debate over company tax cuts. Every proponent and lobbyist for the policy should be asked
what social program or infrastructure project should be cut, or what other tax should go up to
pay for boosting post-tax profits of large business. Indeed Treasury’s own modelling - often
cited to support the tax cut legislation - assumes that either personal income taxes will increase
or government services will be cut.

We hear almost exclusively from the "winners" of a company tax cut. But the public cannot be
expected to make an informed choice as to whether this is the best way to create ‘jobs and
growth’ if we do not know, specifically, where the off-setting cuts will be made. Will it be billions
less for schools, or hospitals? Or will it be the infrastructure spend for our fast growing
population that misses out?

This week saw 47 economists and prominent Australians publish an open letter telling political
leaders that Australia has a revenue problem. That we should be debating how to increase our
overall tax take, not embark on one of the single biggest revenue cuts in modern history.

The group made the point that Australia is one of the lowest taxing countries in all of the OECD.
An associated research paper from the Australia Institute’s Rod Campbell and Cameron Murray
pointed out that if Australia had the same tax to GDP ratio as the United Kingdom we could
triple the age pension. If we had OECD average levels of tax we could build two new NBNs every
year. If we had the same tax level as Denmark we could increase education and health spending
fourfold. The report’s authors found that even by Australia’s recent history our current levels of
tax are low. For the entire Howard era – 1996 to 2007- the tax to GDP ratio was higher than it is
now.

One of the signatories to the open letter was former Secretary of the Department of Prime
Minister and Cabinet, Michael Keating. In his book Fair Share, Mr Keating points out that the
current Government’s own Intergenerational Report projects that its policies will result in ongoing deficits over the next three decades and that the risk of ongoing revenue shortages
includes rising inequalities, damaging to Australia’s potential high-quality innovation agenda and resulting stagnant growth.

And it is gets worse. There is now a considerable risk that Australia is joining an intercontinental
reverse auction on corporate taxation rates. The managing director of the International
Monetary Fund, Christine Lagarde, believes that countries should avoid competitively cutting
rates because that will, ultimately, reduce overall revenue. “By definition,” she said, “a race to
the bottom leaves everybody at the bottom.”

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It seems some corporate leaders are also hearing the message. This week a survey of Australian
company directors found that infrastructure spending, not tax cuts, should be the priority in this
year’s federal budget.

Many company directors also know that ultimately business can only flourish if a decent society
is maintained and that this requires a strong role for government providing quality services,
training, education and modern infrastructure. This of course requires a strong revenue and
taxation base to fund it.

When those who are set to benefit from the tax cut start rejecting it, you know there is a
problem.

But those businesses representatives who want the company tax cut continue to get the lion’s
share of attention and next week some of their claims will be put to the test. A Senate
committee has been established to consider the economic claims made about the tax cut and
whether benefits of tax cut will actually trickle down to workers and the community more
broadly.

Past evidence does not back the assumption that company tax cuts will deliver wider economic
prosperity. Australia experienced its highest growth and lowest unemployment levels in the
1950s, when company taxes were about 46 per cent (now they are 30 per cent). Research also shows there is no correlation between tax rates and economic prosperity domestically or globally.

In fact economic modelling by Dr. Janine Dixon, senior research fellow, Centre of Policy Studies
at Victoria University, and her team shows there will be a net drop in our living standards, as
foreign investors take the benefits and the off-setting effects are felt domestically.
History shows that corporate tax cuts are largely spent on stock buybacks, increased dividends
and acquisitions, all of which only helps to benefit wealthier shareholders – not workers or the
community.

And we now have current live real world experience from President Donald Trump to back up
the historical evidence.

Figures already released following Trump’s tax cut show that investment is down but there has
been a frenzy of share buybacks, increased dividends combined with mergers and acquisitions
that increase CEO power and drive inequality even higher.

If we accept that tax needs to be collected from somewhere, the next question is: what is the
most efficient and fair way to do so?

Taxing profits is a logical place to start because such a tax does not impose a cost on actually
doing business. Business only pays the tax once all costs are covered, only once they are making
money. Company taxes do not in any way inhibit a company from making a profit – indeed, if a
company does not, there is no tax collected. The good news is that a company tax, by design,
cannot turn a profitable company into an unprofitable one.

No truer is this than with Australia’s banks. They are the most profitable banks in the world.
This week’s banking royal commission scandal has uncovered part of the reason why the banks
make so much profit. Australia Institute research has uncovered that $9.5 billion over a 10-year
period would flow to the banks if the company tax rate is cut as proposed. The light that the
Royal Commission is shining on the banks’ practices could not have come at a worse time for
those arguing that Australia’s biggest corporations – of which the banks are the very biggest -
should be gifted such a large windfall.

The proposed company tax cuts are one of the biggest budget outlays in modern Australian
history and we need a well-informed debate which puts all of our options on the table. Only
then can every Australian feel part of a serious debate about how they want to spend $65 billion
dollars and whether now is a prudent time to gift $9.5 billion to the banks.

Ben Oquist is executive director of The Australia Institute @BenOquist

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