Liberal Party’s raison d’être

By February 14, 2018Australian Politics

It is often said, half-jokingly, that the purpose of a rabbit is to make more rabbits, and that all a rabbit does in its life is to that end. Similarly, the Liberal Party in Australia also has a singular purpose, and that is to retain power. It will do anything it thinks it can get away with to retain that power. It will bribe media outlets with undocumented bags of money1, use its ability to change the tax regime to make corporate media outlets accede to their wishes in covering up hypocrisy2, apparent abuses of public money, and accepting of gifts from donors4.

On top of all this, the treasurer, Scott Morrison, has been spruiking the benefits of massive tax cuts to big business, saying it will do all sorts of wonderful things for the economy. These are just like those introduced by the Republican Party in the US, and Morrison is using those as an argument for dropping the company tax rate from 30% to 25%. What would Morrison do if the US dropped its tax rate again? Use the same old argument to drop the tax rate even further. This is simply a race to the bottom. That sort of argument has been used time and again to decrease penalty rates, minimise increases in the minimum wage, and cut taxes for the wealthy.

Morrison, suspiciously, has not released the most recent (December 2017) Treasury modelling done on the proposed corporate tax decrease; only selecting bits supporting his arguments to be released to Murdoch’s ‘Australian’5. If there is ever one thing of which you can be certain; no matter what the government says, the ‘Australian’ will almost always support it; this is especially true of corporate handouts or tax cuts. Anything to give Rupert a helping hand, and vice-versa.

The problem with Morrison’s glowing explanation of the wonders of a corporate tax cut, is that his story is simply lying by omission, again6. In most countries company profits are taxed twice: companies pay tax on their profits; then individual shareholders pay tax on the dividends, with the latter tax rate often being at a discount rate, rather than at their full personal income tax rate. However, in Australia, the company pays tax on its profits, but shareholders get what are called franking credits for whatever tax the company has paid, and these credits reduce their personal income tax7. As a consequence, for Australian shareholders, the corporate tax rate doesn’t matter much, as they effectively pay tax on corporate profits at their personal income tax rate. The result is that, although the headline corporate tax rate may be higher than some other countries, in practice the comparable tax rate is lower for local investors. This means, as many of the international studies have shown, that the impact of cutting corporate tax rates will be limited. Indeed, local shareholders, will receive next to no benefit from such a cut in the rate. However, foreign investors do not get franking credits, so effectively pay tax twice; first at the company tax rate, then at their income tax rate. Therefore, a cut to the company tax rate will benefit foreign investors the most7.

Treasury modelling for the 2016-2017 Budget of a corporate tax cut from 30% to 25% indicates that this tax cut will increase Gross Domestic Product (GDP) by 1.2% over the subsequent decade. However, using GDP, the sum of all economic activity, does not necessarily indicate the benefit to Australians given that a disproportionate amount of the benefits will flow to foreign investors. In fact, a better measure is Gross National Income (GNI), and that same treasury modelling indicates that the GNI will increase only 0.8% over a decade. Even this may be misleading because, if company taxes are lower, some other taxes will have to increase. Modelling by the Grattan Institute, taking this into account, indicates that the real increase in GNI will increase only 0.6% at the most.

Morrison also waxes lyrical about how these tax cuts will flow down to the workers, but this has been shown not to be the case in the US with the tax cuts recently passed by US congress. Numerous large companies have decided to pay out one-off bonuses, not the permanent pay rises that Republicans suggested would occur. Indeed, most of the benefits of the tax cuts will accrue to shareholders, with only very few companies giving wage increases. Bank of America’s bonus handout will cost it about $US145 million, only about 4% of the $US3.5 billion it will receive from the tax cut. Similarly, Wells Fargo’s commitment to raise its minimum wage to $US15 per hour will only comprise 5% of the additional profits obtained by the tax cut8. Indeed, it is expected that only a maximum of 13% of the business tax cuts will go to wage-earners9.

Given that 732 large companies pay no tax in Australia now, and these companies’ collective income was more than $500 billion10. Morrison is yet to explain how decreasing the tax rate on a company which currently pays no tax will provide some incentive to employ more wage-earners, or increase their current employees’ wages. Perhaps Morrison plans to go to negative tax rates, which is what the undocumented $30 million in taxpayer donation to Foxtel looked like. The only reasonable explanation for this proposed corporate tax cut is that it is being used to provide incentive for corporate media News Corp, Fairfax, etc., to look upon the government favourably, or to lock in an increase in donations to the Liberal Party. Whichever it is, it is all about the Liberal Party retaining power, and will have little or no benefit to the average Australian. Indeed, based on their current performance, it is entirely likely that Australia will continue its decline, in almost every measure, among the nations of the world, and will likely become the poor white trash of Asia, as Lee Kuan Yew so stingingly put it12.

Sources

  1. http://www.blotreport.com/australian-politics/money-brown-paper-bag/
  2. http://www.blotreport.com/australian-politics/trousers-down/
  3. http://www.abc.net.au/news/2018-02-10/prime-ministers-office-intervened-in-barnaby-joyce-affair/9418692
  4. https://www.theguardian.com/australia-news/2018/feb/10/barnaby-joyce-declares-gift-of-free-rental-property-in-armidale
  5. https://www.theguardian.com/australia-news/2017/dec/21/scott-morrison-says-australia-needs-tax-cuts-to-offset-hit-from-us-cuts
  6. http://www.blotreport.com/australian-politics/how-politicians-lie/
  7. https://theconversation.com/the-full-story-on-company-tax-cuts-and-your-hip-pocket-59458
  8. http://www.chicagotribune.com/business/ct-biz-bonus-tax-cuts-20180110-story.html
  9. http://money.cnn.com/2018/02/09/news/companies/tax-cut-bonuses-buybacks/index.html
  10. http://www.abc.net.au/news/2017-12-07/corporate-tax-data-released-by-ato/9236878
  11. http://www.blotreport.com/australian-politics/money-brown-paper-bag/
  12. http://www.afr.com/news/politics/the-poor-white-trash-of-asia-a-phrase-that-changed-an-economy-20150323-1m5mzm

 

Leave a Reply