Key issues
2.1
In order to assess the Business Council of Australia's (BCA) Commitment
(the Commitment) to the Senate, it is essential to consider the effects of the
government's proposed corporate tax cuts contained in the Treasury Laws
Amendment (Enterprise Tax Plan No. 2) Bill 2017 (ETP No. 2 bill).
2.2
As stated in Chapter 1, the Commitment asserts that:
- a reduction in the corporate tax rate, as proposed through the government's
enterprise tax plan, is urgent and vital to keep Australia competitive; and
-
if the government's enterprise tax plan is passed, the
signatories will invest more in Australia which will lead to employment of more
Australians and therefore stronger wage growth as the tax cut takes effect.[1]
2.3
While agreeing in theory that the government's proposed corporate tax
cuts may boost economic activity in the long term, a number of academics and
think tanks cautioned that, in the context of the Australian economy, there are
uncertainties about the costs and benefits of the proposal.[2]
2.4
The first part of the chapter considers the effects of the ETP No. 2
bill proposed by the government. It examines the evidence received during the
inquiry in relation to Australia's headline corporate tax rate, how the
government's proposed corporate tax cuts will be paid for, and how they will impact
the national income, employment and wages.
2.5
The second part of the chapter outlines the process which led to the Commitment,
and the value of its content when assessed against the effects of the proposed
corporate tax cuts. It then explores some of the proposed policy alternatives put
to the committee regarding the government's proposed corporate tax cuts.
The headline corporate tax rate in Australia
2.6
In their submission to the inquiry, the BCA claim that Australia's
corporate tax rate 'has remained at 30% for close to 17 years while other
countries have reduced their rates', making Australia's 'the 3rd highest rate in the industrialised world'.[3]
2.7
However, as highlighted by a number of stakeholders, various tax
deductions, concessions, offsets and rebates have had the effect of reducing
the amount of tax Australian businesses actually pay,[4] with Australia being one of only five countries in the Organisation for
Economic Co-operation and Development who continue to operate on a full
imputation tax system.[5]
2.8
In this regard, the Australian Council of Trade Unions (ACTU) referred
to a 2017 United States Congressional Budget Office study, which compared
international corporate tax rates and found that:
...while the headline rate of corporate tax in Australia is 30
per cent, the average rate was substantially less at 17 per cent and after all
deductions were considered the effective rate was a mere 10.4 per cent.[6]
2.9
Drawing attention to the fact that the effective tax rate of Australian
companies is lower than the statutory tax rate, Dr Shumi Akhtar, from the
University of Sydney, suggested that:
...it is not so much the headline corporate tax rate that
matters, but the effective corporate tax rate i.e. the actual rate of tax paid.[7]
2.10
Notwithstanding this, the government plans to reduce the headline corporate
tax rate in Australia from 30 per cent to 25 per cent over 10 years.[8]
Investors
2.11
Some submitters emphasised that, due to Australia's dividend imputation
system (franking credits regime), a reduction in the headline corporate tax
rate will not help domestic investors.[9] Dr Janine Dixon submitted that the cut to the corporate tax rate:
...will dilute the home-ground advantage of dividend imputation
currently enjoyed by Australian investors in Australian business—the
overwhelming majority of small and medium-sized enterprises. This system has
shaped the nature of the Australian economy as it is today. In other words,
relative to the present system, company tax cuts will confer an advantage on
foreign investors, typically shareholders in large businesses such as the
signatories to the Commitment.[10]
2.12
Arguing that a cut in the corporate tax rate provides bigger benefits to
foreign rather than domestic investors, the Grattan Institute (Grattan)
informed the committee that:
Cutting the [corporate] tax rate from 30 per cent to 25 per
cent would increase the after-tax rate of return on Australian equity by about
7 per cent for foreign investors. The rate of return would increase both for
individuals who own shares in Australian companies and for multinational firms
paying Australian company tax.[11]
2.13
In addition, Professor Peter Swan, who suggested that the modelling used
by the government to support their corporate tax plan was 'entirely flawed,'[12] argued that:
This ability of foreign investors to harvest franking credits
implies that the cost of capital for Australian and foreign investors in
Australia is one of the lowest in the world since portfolio (trading) investors
pay close to zero corporate tax.[13]
2.14
Despite this, some submitters suggested that if Australia doesn't decrease
its headline corporate tax rate, it will become a less attractive place for
foreigners to invest. For example, the Institute of Public Affairs (IPA) maintained
that:
Australia's high business tax rate—combined with a $176
billion red tape burden and rigid industrial relations system—is causing
business investment to decline.[14]
2.15
However, Grattan explained that foreign investors take a more
sophisticated approach to investment than just looking at the headline corporate
tax rate. Grattan submitted that:
Foreign investors take a number of factors into account in
determining where to invest, including the corporate tax rate. Corporate
investment decisions don’t just turn on tax rates—they also consider
Australia’s stable government, educated workforce and developed economy.[15]
2.16
By way of example, Grattan reminded the committee that:
Despite a company tax rate of 30 per cent, more money was
invested in mining projects in Australia than in any other country in the world
for each of the eight years of the mining boom.[16]
Trump tax cuts
2.17
Professor Swan suggested that the 'the government's excuse' for the proposed
corporate tax cuts in Australia 'is the Trump reduction in the US [United
States] corporate tax rate from 35 per cent to 21 per cent'. Professor Swan
argued that:
...effectively the US tax rates still remains far higher than
Australia's, despite our higher headline rate of 30 per cent, since Americans
are taxed a second time on company income that has already been subject to tax.
This is because, unlike Australia, there is no franking and no imputation
benefit and no harvesting of franking credits to reduce their cost of capital
down to our much lower rate.[17]
2.18
The Australia Institute (TAI) also considered Trump's business tax cuts
in their submission to the inquiry, and explained that the benefits of the cuts
'are much skewed toward the higher income earners'. TAI submitted that:
...the Trump tax cuts are modest for most people but increase
very rapidly as we go higher and higher up the income distribution. The top 0.1
per cent gets an average of US$104,320 [per annum].[18]
2.19
Using the United States as an example, Dr Akhtar argued that a reduction
in the headline corporate tax rate itself 'is not a necessary or sufficient
condition in itself for economic growth'. In particular, Dr Akhtar claimed that
her analysis showed:
...that President Trump's tax cut announcement in January 2018
did not have an immediate positive knock-on effect on the USA's growth
rate...while the level of foreign direct investment remained the same as the
second quarter of 2017...[19]
Federal budget implications
2.20
Evidence presented to the committee raised concerns about the impact of the
government's proposed corporate tax cuts on the federal budget deficit and
government debt over time. For example, the Australian Council of Social
Service (ACOSS) submitted that the proposed corporate tax cuts are
unfunded and costly. ACOSS emphasised that:
Unlike previous company tax cuts, the proposed cuts are not
funded fully or even partly by removal of business tax breaks that are no
longer fit for purpose.[20]
2.21
Grattan reminded the committee that according to Treasury estimates, the
budgetary costs of the corporate tax cuts are $65 billion over 10 years. However,
Ms Danielle Wood, Budget Policy and Institutional Reform Program Director
at Grattan, explained:
The bulk of that will be in the latter years, as the tax cuts
for big business come into effect. Our concern, really, is that reducing tax
revenue during a period when the budget is still in deficit, as it has been for
nine years, will create further pressures. Sustained budget deficits have seen
net debt already rise, or it will rise next year to 19.2 per cent of GDP. That
limits our capacity for future borrowings and for governments to respond to
adverse economic shocks.[21]
2.22
In addition, Grattan submitted that the government had not explicitly
stated how it plans to fund the proposed corporate tax cut.[22] Expressing to the committee the importance of understanding how the cuts will
be paid for, Ms Wood cautioned that:
The numbers are baked into the budget estimates, and, if you
look at what's driving the return to surplus in 2021, that's largely increases
in personal income tax via bracket creep.[23]
2.23
In contrast, Mr Grant King, President of the BCA, suggested that those
arguing that Australia cannot afford the corporate tax cuts are comparing
'apples and oranges'. Mr King explained that those arguing that the corporate
tax cuts are unaffordable:
...compare a 10-year budget impact of $65 billion in nominal
dollars with a single year of net economic benefit of one per cent of GDP, or
$18 billion in today's terms. But if you take 10 years of benefits then the
total GDP pay-off is $180 billion over a 10-year period, allowing for a slight
lag for implementation. The critical point is that the modelled annual pay-off
of one per cent of GDP is a net benefit—that is, the benefit after taking
account of the revenue costs. So $18 billion is the measure of the permanent
increase in the size of the economy, year in, year out, from cutting company
taxes compared with using the money in another way. The modelling is telling us
that the company tax cut delivers a higher pay-off than other uses of the same
taxpayer dollar. This is because Australia's high company tax is a highly
distorted, inefficient tax.[24]
2.24
Mr Daniel Wild, Research Fellow at the IPA agreed with the BCA, and submitted
that:
All up the best available evidence suggests that cutting the
corporate tax rate to 25 per cent will increase GDP by around one per cent
permanently—about $17 billion in today's dollars each and every year.[25]
Gross National Income
2.25
Many submitters argued that Gross National Income (GNI)—not GDP—was the
key measure to determine whether the government's proposed corporate tax cuts
were in Australia's best interests.[26]
2.26
For example, Dr Dixon submitted that even though economic growth will be
stimulated by the proposed corporate tax cuts, GNI will be reduced because
foreign investors will contribute less to the nation's income through taxation.
In this context, Dr Dixon maintained that in considering the government's
proposed corporate tax cuts, GNI was the measure that really mattered:
Immediately when taxes are cut, as a nation, we will lose a
chunk of tax revenue that we otherwise would have collected from foreign
investors. This has a negative impact not only on government revenue but on our
income as a nation. Over time, some but not all of this loss to the nation will
be offset by higher wages, but we'll never catch up. National income will
remain permanently lower than it would have been without the tax cut.[27]
2.27
Grattan agreed with Dr Dixon that cutting the corporate tax rate in the
short run would reduce GNI and suggested that:
...cutting the company tax rate will see national incomes go
backwards for six years before the cuts start to make a contribution to
national incomes, or even longer under the Government's phased approach.[28]
2.28
While there is a degree of contention among economists about the income
effects of the government's proposed corporate tax cuts, Dr Dixon explained why
the conclusions of her modelling differ to those of Treasury:
...the Treasury's results—are based on long-run, comparative
static modelling. That is modelling that simply asks: how would the economy
look if the company tax rate were five per cent lower? It ignores the
transition costs of getting there. We already have a large foreign investment presence
in Australia which has voted with its feet for the 30 per cent tax rate. A tax
cut is a gift to these investors. For the policy to be a success, the
investment expansion has to beat this initial giveaway. The Treasury modelling
correctly accounts for the repatriation of profits earned on new investment but
does not account for the initial windfall gain to foreign owners of existing
investments.[29]
2.29
Dr Dixon also clarified for the committee why her modelling differed from
that undertaken by independent economist, Mr Chris Murphy. Dr Dixon explained
that, in her opinion, Mr Murphy's economic modelling of the proposed tax cuts
takes into account a gain that he attributes to reduced profit shifting.
According to Dr Dixon, Mr Murphy's argument is that:
...with a lower tax rate, companies are less motivated to incur
the costs and risks associated with reducing taxes by shifting profits to tax
havens. I won't go as far as to say that this doesn't happen, but I didn't take
it into account in my modelling of the tax cut because I didn't think it
relevant with taxes in the range of 25 to 30 per cent. The committee might not
be aware that, in earlier versions of his modelling, the basis of this
spectacular estimate estimated $2.39 consumer benefit for every $1 of tax revenue
forgone. The reduced profit-shifting accounted for a significant proportion of
that benefit. This estimate has since been revised downwards.[30]
2.30
In contrast, Mr Murphy submitted that his modelling used the consensus
in recent literature on the sensitivity of accounting profits to the corporate
tax rate, as opposed to Dr Dixon's modelling, which assumes profit shifting
away. Specifically, Mr Murphy suggested that his work identifies the role of
profit shifting which demonstrates that:
...reducing my profit shifting elasticity from a consensus
value of 0.73 to a low value of 0.5, has only a small effect on the results.
The estimated gain in consumer welfare from reducing the corporate tax rate
from 30 to 25 per cent declines only slightly from $4.9 billion to $4.4
billion.[31]
2.31
With regard to the different modelling of the proposed corporate tax
reforms by economists, Dr Dixon reminded the committee of the importance of 'parameter
assumptions'. Dr Dixon highlighted to the committee that:
We need to have some idea of how much additional capital can
be absorbed by a labour force of a particular size. This determines how quickly
wage growth chokes off the investment possibilities that open up under a
company tax cut. The governance modellers have chosen to use a top-of-the-range
parameter value, meaning that they conclude that a relatively large amount of
capital is absorbed before wage growth chokes it off. These technical concerns
may not be of great interest, but they do illustrate that, although the case for
a company tax card carries the imprimatur of government-appointed economic
modellers, varying just a few assumptions can turn the outcome from positive to
negative.[32]
2.32
Dr Jim Minifie, Productivity Growth Program Director at Grattan, also
provided evidence around the range of parameter assumptions relevant to Dr
Dixon and Mr Murphy's modelling. Specifically, Dr Minifie understood that
implicit in Dr Dixon's modelling:
...would be, once you take into account dynamics, the
proposition that potentially the tax rate is too low. And, if you look at the
work by Chris Murphy, that would imply potentially an optimal tax rate that
might be around 20 or a little bit lower, so it becomes a feature of being not
so far off the optimal tax rate that the uncertainties about the parameters...can
dominate the discussion.[33]
2.33
On this point, Dr Minifie suggested that 'if you're within a few
percentage points, a change really won't make much difference to net national
income'.[34]
2.34
Regardless of the technicalities associated with economic modelling,
Dr Dixon asserted that as 'national income will be lower...there is no way
that all Australians can be better off' because:
If no attempt is made to recoup the lost taxation revenue,
then government spending on essential services will be less than it otherwise
could have been. If attempts are made to recoup the lost taxation revenue
through bracket creep or a higher GST, then post-tax wage gains to employees
will be eliminated.[35]
Employment and wages
2.35
Arguing against the government's proposed corporate tax cuts, the ACTU
maintained that:
...the modelling that the Government is relying on to assert
that workers will receive a significant benefit from corporate tax cuts assumes
that businesses will pass the benefits of corporate tax cuts in full to
creating new jobs and wage increases.[36]
2.36
The ACTU submitted that the government's proposed corporate tax cuts:
...will not fix youth unemployment, they will not make secure,
fairly paid jobs available to Australian workers, they will not address growing
inequality and they will not give workers the pay rise they need.[37]
2.37
Ms Wood of Grattan expressed scepticism about Treasury's projections
concerning wage growth, informing the committee that Grattan had looked 'at the
numbers' and considered that 'the wage growth numbers look particularly
optimistic'.[38]
2.38
Noting that business profits in 2017 were up by 22 per cent, and that
wages did not increase proportionally, Per Capita Australia (Per Capita) suggested
that the proposed corporate tax cuts 'will not lead to significant increased
investment or higher wages for Australian workers'.[39] Per Capita highlighted that:
There is a real discord between the fiscal and monetary
policy settings of the Australian economy and the behaviour of business—one
which is directly responsible for weak wage growth and low investment in the
Australian economy.[40]
2.39
In contrast, the BCA argued that the proposed corporate tax cuts will
have the overall effect of increasing investment which will be 'vital for
underpinning jobs and wages growth'. Specifically, the BCA submitted that:
Over half the benefits from a tax cut flow to Australian
workers. Real wages would be more than 1% higher—in today's economy, around
$750 extra per year for an average wage earner.[41]
2.40
However, when questioned by the committee about the impact of corporate
tax cuts on wages, the BCA was unable to provide the committee with an example
of a country where company tax cuts had led to higher wages.[42] Indeed, when asked 'can you give us an example of another country where the tax
cuts have resulted in wage rises?'—Ms Westacott answered, 'We'll take it on
notice'.[43]
Relationship between wages and
labour productivity
2.41
Citing the 'seriously weakened' relationship between wages and labour productivity
in Australia, TAI suggested that:
Even if company tax cuts led to an increase in real capital
investment, and even if that investment led to an increase in the capital stock
(relative to the number of workers employed), and even if that higher
capital-labour ratio automatically produced an increase in labour productivity,
the assumption that workers' wages would automatically and fully rise to
reflect that higher productivity is thoroughly misplaced.[44]
2.42
Mr Warwick Smith, Senior Economist at Per Capita, agreed, and suggested
to the committee that in recent years the relationship between labour
productivity and wages has been broken. Based on recent data, Mr Smith
explained that even if the corporate tax cuts result in investment and
increased labour productivity 'it's likely that that will result simply in
greater profits rather than a flow-through, necessarily, to wages'.[45] Mr Smith stated:
...even if we assume that everything the Business Council says
is correct and the Treasury modelling is also all correct—and there are lots of
reasons to suggest that the Treasury modelling is overly optimistic—there will
be a very modest increase in wages and GDP over the long term as a result of
these tax cuts.[46]
2.43
The ACTU also questioned the optimism of the assumptions within
Treasury's modelling about what proportion of the tax cuts will be passed onto
workers as increased wages. Mr Christopher Watts, Social Policy Officer from
the ACTU, suggested that:
It appears to us the Treasury modelling assumes a large proportion
will be passed on. We don't believe that's backed up by any kind of observation
of corporate behaviour either domestically or internationally when they get
more money.[47]
The industrial system
2.44
Mr Tom Roberts, Director of Industrial and Social Policy at the ACTU,
also noted that the signatories to the Commitment were 'some of the
hardest-bargaining companies in the country'. Mr Roberts stated:
Our union affiliates deal with them on a day-to-day basis,
and it seems to me that, no matter how profitable these companies are, they're
not in the business of giving away wage rises, at least to the broad base of
their employees.[48]
2.45
Tax Justice Network Australia (TJN) also emphasised the importance of
the industrial system as a mechanism to transfer company profits to employees
via wage increases. TJN submitted that:
The vast majority of MNEs [multinational enterprises] do not
give away profits to employees as wage increases. Many only increase wages when
they are forced to, be it through needing specific skill sets for which there
is a shortage and for which they must compete or through industrial action by
their employees.[49]
2.46
ACOSS also raised questions about whether or not the proposed corporate
tax cuts will flow through to greater wages 'in an environment where workers
have very limited bargaining power'.[50]
Executive remuneration
2.47
Given the nature of business in Australia, some submitters reminded the
committee that the proposed corporate tax cuts will likely flow through to
greater remuneration for executives. For example, Ms Emma Dawson, Executive
Director of Per Capita, informed the committee that, as the Australia Industry
Group's Business Prospects report released in January 2018 makes clear:
...business leaders regard weak wage growth as an essential
factor in their increased profitability and growth, the results of which they
will, on all behavioural evidence, continue to return to shareholders in
increased dividends and to themselves in executive remuneration. In short,
there is simply no evidence, based on recent business behaviour, that a tax cut
would necessarily be passed through to workers through increased investment or
wages.[51]
2.48
TJN also brought to attention a survey conducted by Morgan Stanley
analysts of the Trump tax cuts in the United States, which found that 13 per
cent of the tax 'give away' will go to pay rises, bonuses and employee
benefits. However, TJN highlighted that:
Even here, there are questions of the distribution of the
benefits, with no reported analysis of what proportion of these increases in
wages and bonuses will go to highly paid executives and what portion will go to
workers on minimum wages.[52]
Committee view
2.49
Tax reform is not as simple as effecting a change to the headline
corporate tax rate, and the committee is of the view that a reduction in the
headline corporate tax rate in Australia is neither a necessary nor sufficient
condition in itself for economic growth. The committee notes that the headline
corporate tax rate in Australia is currently 30 per cent and based on the Congressional
Budget Office (CBO) analysis, the average rate is substantially less at approximately
17 per cent, and the CBO states that after all deductions the effective
rate is approximately 10.4 per cent.
2.50
The committee notes concerns raised by some stakeholders that Australia
has the third highest headline corporate tax rate in the industrialised world,
and that if it does not decrease, Australia will become a less attractive place
for foreigners to invest. However, noting the evidence received regarding the
benefits to foreign investors from the Australia's dividend imputation system
(franking credits regime), and the various deductions, concessions, offsets and
rebates which reduce the amount of company tax actually paid, the committee
considers that Australia remains very competitive for both foreign and domestic
investors. Indeed, the committee understands that investors take a more
sophisticated approach to investment than just looking at the headline
corporate tax rate. For example, some of the factors investors may take into
account in determining where to invest include whether a country has a stable
government, an educated workforce and a developed economy.
2.51
The committee is cognisant that while the proposed corporate tax cuts may
incentivise some new investment, it will also provide a windfall gain for
existing investments held by foreign investors. At this stage, it is very
uncertain to the committee how much new investment will begin, and how much of
the windfall will find its way back to foreign investors through increased
dividends or share buy backs, should the ETP Bill No. 2 bill be passed.
2.52
The committee is mindful that the government has not explicitly stated
how the corporate tax cuts will be paid for, and notes that most academics believe
that the cuts will be paid for through income tax bracket creep. The committee
is of the opinion that how the government will pay for its proposed tax cuts is
of paramount importance, and the committee is particularly concerned that the
corporate tax cut proposals could be paid for through bracket creep, thereby reducing
the after tax income of many Australian families.
2.53
The committee notes Treasury analysis which indicates that GDP would
grow as a result of the government's proposed corporate tax cuts. However, it considers
that GNI is the more important economic measure. The committee is persuaded by
Dr Dixon's modelling which indicates that national income will fall if the tax
cuts are passed, as more profits flow off shore for foreign investors. The
committee is alarmed that in the short term, the government's proposed cut to
the corporate tax rate will see national incomes go backwards for six years (or
longer under the government's proposed phased approach) before the cuts even
begin to make a contribution to national income.
2.54
The committee is deeply concerned that when questioned about the impact
of corporate tax cuts on wages, the BCA was unable to provide an example of a
country where corporate tax cuts had led to higher wages. The committee understands
the importance of the industrial system as a mechanism to transfer company
profits to employees via wage increases, and is concerned that the signatories
to the Commitment are some of the hardest bargaining companies in Australia,
with a history of engaging in practices to drive down wages. In this regard,
the committee also notes recent data which indicates there is dwindling
bargaining power of workers and their representatives.
2.55
Given the nature of business in Australia, the committee considers that
there is a real risk that the proposed corporate tax cuts will flow through to
greater remuneration for executives and not workers. The committee notes that
while wages outcomes of the proposed corporate tax cuts are uncertain, it is undoubtedly
possible that directors stand to gain immediately if the ETP Bill No. 2 is
passed, by way of short and long term incentives linked to shares or options.
2.56
The committee is of the view that—even if the proposed company tax cuts
led to an increase in real capital investment, and that led to an increase in
the capital stock (relative to the number of workers employed), which automatically
produced an increase in labour productivity—the assumption that workers' wages
would automatically and fully rise to reflect higher productivity is thoroughly
misplaced. In this context, the committee notes that, even if one assumes that
the optimistic Treasury modelling is correct, there will only be a very modest
increase in wages over the long term as a result of the government's proposed
corporate tax cuts.
Recommendation 1
2.57
The committee recommends that the Treasury Laws Amendment (Enterprise
Tax Plan No. 2) Bill 2017 not be passed.
The BCA Commitment
2.58
The BCA Commitment to the Senate was 'one document that took 24 hours'.[53] It was circulated only to selected BCA members for signature.[54] The big four banks and AMP were not given the opportunity to sign the Commitment.[55] Ms Jennifer Westacott, Chief Executive of the BCA, explained that in order
to get members to sign the Commitment:
People were approached. Some people could not be contacted.
We did this in 24-hours because senators were asking for a commitment and
that's what the commitment went to.[56]
2.59
When questioned by the committee about the process the BCA undertook to
find signatories to the Commitment, Mr King of the BCA, stated:
We did not begin the day with a list. We began the day by
calling a number of companies... not everybody was available to take that call at
that point in time. Many were overseas...
At the end of the day, we didn't begin by saying, 'Here's
10.' We began by working through with our members who was available and who
would be willing to make that commitment in the time frame that we had
available.[57]
2.60
Noting that 'the BCA has been one of the leading bodies arguing for a
reduction in corporate income tax, making all sorts of claims about the
benefits', TJN commented that:
It is disappointing that a mere 10 CEOs were willing to sign
the joint voluntary non-binding pledge to the Senate, out of the 132 corporate
members listed on the BCA website, or less than 8% of the membership. It is
hardly a ringing endorsement from the BCA membership for the pledge.[58]
2.61
With regard to the substance of the Commitment, the Centre for
Independent Studies (CIS) suggested that it was 'not surprising' that the Commitment
was cast in very general terms and warned against legislators making such a Commitment
a
pre-condition for company tax cuts. CIS maintained that:
Tax cuts should enhance economic freedom. Conditional cuts
would be a step in the other direction, towards central economic planning,
corporatist economic management and a social contract between business and
government based on the notion that business will invest more only if it is
pressured into doing so by government regulation.[59]
2.62
The committee questioned witnesses about the value of the BCA's Commitment
to increase investment which will lead to employment of more Australians and
stronger wage growth, if the ETP No. 2 bill is passed.
2.63
Mr Breheny of the IPA stated:
...does it [the Commitment] help or hinder the case for tax
cuts? I think it's neither here nor there. There are a number of different ways
that the BCA could've gone. They could've made an ironclad, concrete commitment
about increasing the wages of every one of their employees by 10 per cent.[60]
2.64
Professor Swan told the committee that he thought the Commitment was 'a
pile of rubbish'.[61] However, this was disputed by the only signatory to the Commitment who appeared
before the committee, Mr Frank Calabria, Managing Director and Chief Executive
Officer of Origin Energy. That said, in speaking to the committee about the
outcomes of the Commitment, Mr Calabria clarified:
I wouldn't leave you with a message that we wouldn't invest
without a tax cut. We would invest. We made a commitment that we would invest
more. With a more attractive cost of capital and our ability to introduce more
projects that are viable, it will lead to more investment. By leading to more
investment, we will see job growth, and we believe that will flow through to
wage growth.[62]
2.65
Indicating that it was in the public interest for the Senate to inquire into
what the Commitment actually means, Mr Simon Cowan, Research Manager at CIS, suggested
that:
...the mechanisms to measure any commitment or performance by
particular companies in the economy are not a strong indicator of whether or
not company tax cuts are a good policy or indeed whether or not the tax cuts
are a success or failure...[63]
2.66
With specific reference to the substance of the BCA Commitment, Mr Cowan
explained that:
It will be very difficult, if not impossible, to separate out
the global economic impacts and all of the other factors that are at play here
in addition to the factors that would have occurred had the company tax cut not
happened. So there's no counterfactual to assess this against, and there's no
way to be certain that any positive benefits from investment or wages come from
company tax cuts or, indeed, that, if there are no changes, the company tax cut
didn't provide a benefit that we would not have otherwise received.[64]
2.67
With regard to the element of the Commitment concerning employment and
wages, the ACTU submitted that the promise to spend any extra funds provided by
a tax cut on employment and workers' wages:
...might be credible if the companies concerned had a long
history of being stellar employers, passing on the profits earned by their
company to their workers. Unfortunately, this has not been the case with
several of the signatories.[65]
2.68
ACOSS maintained that 'there is no evidence that the corporate tax cut
will deliver the investment or wage growth outcomes implied by the BCA'.[66] Similarly, GetUp stated that they 'believe the BCA's so-called commitment on
wages and employment has zero credibility'.[67]
2.69
Put plainly, Mr McCallum of the ACTU told the committee:
When you boil it down, the core of the BCA's statement to the
Senate is big business saying, 'Trust us,' but people don't. Trust in
corporations is at a real low at the moment, and for good reasons. They don't,
because corporations already don't pay their fair share of tax. They don't,
because there has been no increase in wages while business profits have been
growing. They don't, because we have been seeing shocking revelations from the
banking royal commission about the conduct of big banks who alone stand to
benefit from a windfall of over $10 billion under these tax cuts.[68]
Committee view
2.70
The committee disagrees with the BCA that 'senators were asking for a
commitment'.[69] However, the committee considers that once the Commitment was received it was
important for the Senate to inquire into its meaning and veracity, to ensure it
fully understood its significance in considering the corporate tax cuts
proposed in the ETP No. 2 bill.
2.71
It is of particular concern to the committee that the evidence received
during the course of the inquiry revealed that the Commitment was drafted, and
selected companies from BCA's membership were approached to sign it, within a
24 hour period. In this context, the committee notes that BCA's members from
the banking and financial services sector, specifically the big four banks and
AMP, were not provided with the opportunity to sign the Commitment. The
committee finds this alarming, noting the significant part the financial sector
plays in Australia's economy.
2.72
The committee notes the evidence received from submitters about the
value of the BCA Commitment, such as 'it's a pile of rubbish' and 'neither here
nor there' and that it would be difficult, if not impossible, to determine
what new investment would come from the proposed company tax cuts and those
investments which may occur regardless of any such intervention. Indeed, the
committee observes that the signatories to the Commitment would most probably
continue to invest without the proposed tax cut.
2.73
In light of past practices, the committee agrees with stakeholders that
the BCA's Commitment on wages and employment has little credibility. Overall,
the committee is of the view that the signatories to the BCA Commitment are
saying pass the ETP bill No. 2 bill and 'trust us' to increase investment which
will lead to greater employment of more Australians and stronger wage growth. The
committee again notes the US Congressional Budget Office analysis that the
effective corporate tax rate is 10.4 per cent. Therefore, based on the evidence
received, the committee is not persuaded that the proposed corporate tax cuts are
warranted, nor that the suggested benefits would flow through to greater
employment and greater wages for Australian workers.
Alternatives to a corporate tax cut
2.74
Dr Richard Denniss, Chief Economist at TAI, informed the committee that
in a recent survey of members of the Australian Institute of Company Directors,
the overwhelming majority of them thought that the company tax cuts weren't a
high priority.[70]
2.75
Mr Smith of Per Capita suggested to the committee that it was important
to think about the opportunity cost of the proposed corporate tax cuts:
What could we have done instead with government expenditure
or tax reform rather than have these corporate tax cuts? If the goal is
increased investment, increased employment and increased wages, which is the
implication of the BCA's letter, then corporate tax cuts are probably a pretty
poor choice because they are only going to really spur investment from foreign
investors because of dividend imputation, and they do very, very little in
terms of domestic investment decisions.[71]
2.76
Ms Dawson of Per Capita expressed the view that forgoing revenue due to
corporate tax cuts was a bad decision, when it could be used:
...for budget repair or, in our view, used to invest in lifting
people out of poverty and educating the future citizens of Australia or in
building infrastructure that would otherwise contribute.[72]
2.77
Some submitters were also of the strong view that there were more
preferable approaches that would better target new investment. For example,
Grattan submitted that:
Alternatives to the company tax cut that apply only to new
investments— such as an investment allowance or faster depreciation rates—could
provide an equivalent boost to investment, but at lower long-term budgetary
cost. These approaches would not provide a 'free kick' to existing
shareholders, but could prove more difficult to administer.[73]
2.78
Ms Wood of Grattan explained these policy alternatives to the
government's proposed corporate tax cuts in more detail:
Accelerated depreciation schemes or investment allowances are
a lower cost way of reducing effective tax rates. This is because they only
subsidise new investments and don't give a tax break to those incomes occurring
from investments that firms have already made. We think these are an
alternative worth exploring to boost investment and wages in the current
budget-constrained environment.[74]
2.79
Dr Dixon considered that 'a company tax cut doesn't actually beat just
doing nothing' and maintaining the status quo.[75] Dr Dixon was adamant that there were other policies would more directly
increase investment than a corporate tax cut:
...policy to increase investment along the lines of an
investment allowance, instant deductions—those types of policies—based on
modelling that I have done more recently, an investment allowance would be more
effective. It suffers the same problem in that investments that would have
taken place anyway now get a little free kick, but we think that loss is less
relative to the gain that you would get.[76]
Committee view
2.80
It is apparent to the committee that while the government's proposed
corporate tax cuts may boost economic activity in the long term, in the context
of the Australian economy, there remain genuine uncertainties about the costs
and benefits of the cuts. The committee notes that policy alternatives to the
proposed cuts suggested by stakeholders would result in an equivalent boost to
investment, but at lower long-term budgetary cost. Given the seriousness of the
current budget deficit and the reduction of tax revenue that would result from
the proposed corporate tax cut, the committee has formed the view that it
should continue this inquiry into the near future.
Recommendation 2
2.81
The committee recommends that the inquiry be extended until 18 October
2018.
Senator Chris Ketter
Chair
Navigation: Previous Page | Contents | Next Page