Does cutting company tax increase wages? > Check the facts

Who: “By cutting corporate taxes we…boost real wage growth,” The Coalition’s ‘Our Plan’.

The claim: That wages will increase as businesses pass on the reduction in tax through lower prices, having the effect of increasing real wages.

The facts: The claim relies on American studies cited in the Henry tax review. However, the US company tax system is different to the Australian system.

Over Australia’s post war period company taxes started off at 45 per cent or more and have been reduced to the present 30 per cent. In the meantime, wages as a percentage of national income did not increase as the claim would predict, falling from 57 to 54 per cent of national income, according to national accounts figures. Australia’s own history of cutting company tax rates does not support the view that wages should have increased.

The finding: There is serious doubt that the academic and theoretical work underpinning the claim is valid in the Australian context and the available evidence does not support the claim.

Discussion of evidence: One of the studies cited in the Coalition’s ‘Our Plan’ suggests that a one per cent change in company tax rate would change wages by ‘close to’ one per cent. In Australia, using budget figures and national accounts data, that study would mean a company tax cut of $2.2 billion (one per cent) would boost wages by ‘close to’ $7.1 billion (one per cent of the wages bill).

An earlier study by The Australia Institute shows that the company-tax-cut/wages link is not supported by the evidence in Australia.

Furthermore the studies cited to support the claim do not apply in a tax system that includes dividend imputation. This means company tax is treated as a pre-payment on behalf of individual taxpayers who receive dividends and then receive a credit for the company tax already paid. The ultimate owners of the business do not benefit from company tax cuts.

General Enquiries

Tanya Martin Executive Assistant

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mail@australiainstitute.org.au

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jake@australiainstitute.org.au

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