Economic Analysis Report: Impact of Company Tax Cuts in Australia

This report analyzes an article by Janine Dixon and Jason Nassios, economists at the Centre of Policy Studies, Victoria University, discussing the impact of company tax cuts in Australia. The authors argue that while company tax cuts may stimulate investment and wage growth, the effects are modest and can be curtailed by rising wages. They highlight the crucial distinction between economic growth and domestic income, asserting that tax cuts can impede domestic income growth due to reduced tax revenue from foreign investors. The report also examines the potential increase in national debt and the uneven distributional consequences, particularly concerning dividend imputation and the impact on local versus foreign investors. The authors conclude that the upfront loss of government revenue outweighs the benefits and that a company tax cut is not the most suitable lever at this point, given Australia's success in attracting foreign capital.

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SE Opinion
HD Company tax cuts are not the only growth tool in the box
BY Janine Dixon, Jason Nassios. Janine Dixon and Jason Nassios are economists at the Centre of Policy
Studies, Victoria University.
WC 1,011 words
PD 7 August 2017
SN The Australian Financial Review
SC AFNR
ED First
PG 39
LA English
CY Copyright 2017. Fairfax Media Management Pty Limited.
LP
Tax reform
Australia is a proven success in attracting investment capital. Cutting taxes to get more just looks
expensive and ineffective.
TD
With the company tax cut debate back on the agenda, the battle lines are drawn and the usual suspects
have taken up their positions. Critics have been quick to point out perceived hypocrisy, particularly in
relation to prominent Labor figures. Meanwhile, at Victoria University's Centre of Policy Studies we have
been running detailed, dynamic computable general equilibrium model simulations of the impact of a cut
to company tax in Australia.
Will a company tax stimulate or impede growth?
It depends what you mean by "growth". A cut to company tax will stimulate investment and wages, as
the Coalition government and the BCA have been keen to point out. These effects will be modest,
derived from investments that are profitable at a 25 per cent tax rate but not at a 30 per cent tax rate.
New investments will need workers. To attract these workers away from their existing jobs, wages will
grow. Wage growth is great for workers, but it will also quickly curtail any sought-after investment boom.
An investment that looks profitable at 25 per cent tax under today's wages will not necessarily be
profitable as wages go up. Our estimation is that the potential new investment opportunities that open
up under the lower tax rate are quite limited, facilitating a small positive stimulus to economic growth.
But here's the catch. Even though economic growth is stimulated, domestic incomes are reduced,
because foreign investors will contribute less to the nation's income through taxation. Immediately when
taxes are cut, as a nation we will lose tax revenue from foreign investors. Over time some but not all of
this loss to the nation will be offset by higher wages.
So when Bill Shorten says a tax cut "impedes growth", while his meaning is somewhat ambiguous, he is
not wrong. The BCA was quick to deride the statement as "patently untrue", appealing to the argument
that the tax cut would "grow the economy". Shorten, however, must have been referring to growth in
domestic income, which will indeed be impeded by a company tax cut. Domestic income is the more
suitable measure of material welfare, and the measure with which governments ought to be concerned.
What about national debt?
Does it matter? Shorten is also correct that the tax cut will accelerate national debt. We anticipate that
10 years after a company tax cut from 30 per cent to 25 per cent, the nation's foreign debt would be at

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least 2 per cent higher as a percentage of GDP than it would have been had the company tax rate
remained at 30 per cent. This is not necessarily a problem, but what it means is that Australians will be
able to consume slightly less of their annual output than they otherwise would have. Again, the gap
between "economic growth" and "income growth" is apparent.
Does the tax cut pay for itself?
The stimulus will not be enough to enable this policy to self-fund. In other words, the tax base won't
grow enough to enable the recovery of the government revenue lost under the tax cut. Domestic
taxpayers will cover the revenue loss in one way or another - a higher rate of income tax or GST, or a
reduction in government services are the obvious candidates.
Why is dividend imputation important?
Perhaps the divisive nature of this policy change derives from the fact that the distributional
consequences of a company tax cut are uneven. Local investors, in particular the owners of small and
medium enterprises, are not directly impacted by a change to the rate of company tax because of
dividend imputation. However, if company tax is cut, higher wage costs will need to be borne by these
businesses. To some extent we will see foreign ownership crowding out domestic ownership.
At the big end of town, dividend payout ratios are much lower. Apart from a small cohort of New Zealand
residents, non-resident shareholders are unable to claim Australian franking credits. From their point of
view, an Australian franking credit carries no value. Taking into account the needs of both its foreign and
domestic shareholders, the management of a company with a significant proportion of foreign ownership
(such as BHP or Rio Tinto) will pay out a smaller share of its operating cash flows as dividends. With
lower payout ratios, domestic investors in these companies receive fewer franking credits and effectively
pay some company tax. These are the domestic investors who stand to gain from a cut to company tax.
Under a lower company tax rate, these investors will enjoy higher capital gains and contribute to
investment growth.
Do we need action?
Our modelling shows that the starting point is crucial. We calculate that the upfront loss of government
revenue is too large to justify the later benefits in terms of investment and wage growth. From a different
starting point, the story may have been quite different. With less foreign-owned capital to start with, the
loss of tax revenue from foreign investment may have been justified. Ironically, if we hadn't been so
successful in attracting foreign capital at the existing 30 per cent tax rate, the case for a tax cut would be
a lot stronger.
Australia is fortunate to have the well-deserved confidence of the world's investors, who have made a
significant contribution to our economic landscape and relatively high standards of living. While business
investment goes through a weak patch, action may appear warranted. However, a company tax cut is
not the "only lever" we have left in the toolbox, nor is it even a suitable lever at this point in time.
Janine Dixon and Jason Nassios are economists at the Centre of Policy Studies, Victoria University.
CO vctuvu : Victoria University (Australia)
NS e211 : Government Budget/Taxation | nedc : Commentaries/Opinions | ccptax : Corporate Taxation |
c13 : Regulation/Government Policy | ccat : Corporate/Industrial News | e21 : Government Finance |
ecat : Economic News | ncat : Content Types | nfact : Factiva Filters | nfcpex : C&E Executive News
Filter | nfcpin : C&E Industry News Filter
RE austr : Australia | apacz : Asia Pacific | ausnz : Australia/Oceania
PUB Fairfax Media Management Pty Limited
AN Document AFNR000020170806ed8700015