The centrepiece of the Turnbull government’s ‘plan’ for the economy, and its plan to win the upcoming election, is based on some heroic assumptions. There is no strong evidence to support the government’s claim that cutting the company tax rate will boost “jobs and growth”. And there is no strong evidence that the public will vote for a party selling the theory of trickle-down economics as a solution to their real-world problems.
But evidence or no, the Prime Minister has bet The Lodge that his communication skills are sufficient to sell such a message. The Coalition’s communication strategy is to rely on the unlikely combination of “commonsense” and economic modelling to help sway the public. The problem for the government, however, is that real-world economics has little in common with commonsense, and even less in common with economic modelling.
Take the link between company tax cuts and investment for example. While commonsense suggests that lowering the company tax rate would lead to an increase in the after-tax return on an investment, commonsense ignores the existence of Australia’s unusual system of dividend imputation. Under dividend imputation the “company” tax paid by a company is credited against the “personal” tax payable by the owner of the company. Put simply, any cut in the company tax rate simply leads to an increase in the personal income tax payable by the owner – and no change in “after tax return” on investment. Whoops.
One group of owners who might see an increase in the “after tax return” on their investment is foreign investors who cannot use Australian “imputation credits” to offset their personal tax liabilities in their home country. But while few Australians understand that the main “benefit” of a cut to the company tax rate is to foreign investors, it seems not even Turnbull government ministers understand the implications of Australia’s “bilateral tax treaties” with countries such as the US.
Just as Australian shareholders can claim a “credit” for any Australian company tax they pay against their Australian personal income tax liability, US companies can claim a credit for any company tax they pay in Australia as a credit against their US company tax liability. Put simply, a cut in the Australian company tax rate from 30 per cent to 25 per cent will mean that US companies (who face a 35 per cent tax rate back at home) will pay less tax here in Australia and pay more tax to the US Internal Revenue Service.
The existence of such a tax treaty between Australia and the US, our largest foreign investor, means that, like Australian shareholders, US companies will receive absolutely no increase in their “post tax return”. The US budget, on the other hand will, according to David Richardson from the Australia Institute, receive an $US8 billion windfall from Malcolm Turnbull’s “economic plan”. Who said Australia is not a generous country?
Neither the public’s “commonsense” nor Treasury’s modelling incorporates the existence of such tax treaties into their analysis. Indeed, the Minister for Finance seems entirely unaware of the complexities of the tax system that he oversees. When asked if it was true that the less tax US companies paid in Australia the more tax they would pay back home to the IRS, Mathias Cormann responded “[the Australia Institute] completely ignore how these things actually work in practice and the way these things will work in practice, is that more competitive company tax rate in Australia will help us bring more investment into Australia, it will help us grow the economy by more. It will help us create more jobs.”
The government’s determination to remain ‘on message’ is evident, but their understanding of the realities of our tax system is far less clear. While it’s true that “commonsense” suggests a cut in the tax rate should reduce the amount of tax paid, and it’s true that Treasury’s modelling makes such an assumption, the fact is that the real economy is more complicated than either commonsense or economic models allow.
Commonsense tells us that if the government really believed that cutting the corporate tax rate was enough to create jobs for the 730,000 currently unemployed then they wouldn’t be spending $50 billion on submarines to “create jobs” in Adelaide. Commonsense tells us that voters in Armidale, Altona and the Atherton Tablelands might think that they too need a “plan for jobs” that is based on more than trickle-down economics. But maybe they are wrong about that too.
Richard Denniss is chief economist at the Australia Institute @RDNS_TAI
First published by The Australian Financial Review – here.