Greg Jericho summarised1 a report by the IMF which shows that the assertion by neoliberal economic enthusiasts that income tax cuts pay for themselves, is abject garbage. This was originally the myth put out by the Reagan administration, and it led to Reagan turning the US from the biggest creditor to the biggest debtor nation2,3. That was because the massive tax cuts he made (top marginal income tax rates went from 70% to 26%) led to such a shortfall in revenue that other taxes could not even cover it1. It needed a massive influx of foreign capital to cope with its balance of payments problems. The US has been trying to cope with this turnaround for decades. Its gross debt to gross domestic product (GDP) ratio is now about 107% (Australia’s is about 34%)4.
The IMF report did determine that giving tax cuts to the top 25% of the population would lead to increased spending on goods and services, which could improve wages for those lower-income people providing those goods, but it would also cause price increases and would need to be paid for by either other tax increases or cuts to government spending. The total impact, even when you accounted for policies that tried to “protect the poor” to reduce the impact of other tax increases and spending cuts, was “a significant decline in consumption of low- and middle-income households, and a significant reduction of the middle class”. So you get strong economic growth, but you reduce the size of the middle class and increase inequality1. The authors also concluded that the trickle-down effect was insufficient to raise the welfare of the bulk of the population. However, the authors found that a tax cut targeted at middle-income earners, while generating less overall growth, reduced income inequality and polarisation by moving people from lower income households back into the middle class1.
Treasurer Scott Morrison hasn’t caught up with modern thought on the failure of trickle-down economics. He still seems to think that cutting company tax will benefit everyone. This is based on economic modelling which Morrison has refused to release5. After this refusal to release the modelling, he stated that he didn’t release it because econometric models don’t matter to small business owners down the pub. That may well be true, but it would be useful to commentators and economists to see what the initial assumptions are and if they are believable. Morrison then admitted that when it feels like a policy will work, there is no need to model its impact on the economy before spending the money6. So, in Morrison’s limited mind, it is simply the ‘vibe’. It made one wonder what Morrison was trying to hide.
The coalition maintains that the decrease in company tax will boost GDP by more than 1.2% in the long term, at a cost to the budget of $48.2 billion over the next decade. However, the Treasury research paper on which the Coalition relied tells a more modest story, in that the real benefit will be about 0.5%, and it will be a long time before we are any better off at all7.
The big beneficiaries of this corporate tax cut are overseas investors. In most countries, company profits are taxed twice: companies pay tax on profits, and then shareholders pay tax on their dividends, although the latter is at a discounted rate compared to their personal rate of income tax. In Australia, the dividends from shares are only taxed once. Investors get franking credits for whatever tax a company pays and these credits reduce their personal income tax. Consequently the company tax rate doesn’t matter to Australian investors; they effectively pay tax on corporate profits at their personal income tax rate7. As a result, although Australia has a relatively high corporate tax rate compared to other countries, in practice, because of franking credits it is effectively lower for local investors. As a consequence, international studies on the impact of cutting corporate tax rates are not readily applicable to Australia7.
Unlike local investors, foreign investors do not benefit from franking credits, so in paying tax twice, dropping the corporate tax rate has a significantly larger benefit for them. This supposed benefit to GDP will include the flow of cash to non-residents, and perhaps a better measure will be Gross National Income, and that will be significantly less (at 0.8%), with about one third of the GDP increase flowing overseas. On top of that, other taxes will have to be increased to cover the loss in revenue by the corporate tax cut, and Treasury estimates this will cut back the GNI increase to just 0.6%.
So, the Coalition is continuing to lie, both by fudging the figures and by using measures that do not tell the real story for the populace. It is just another way that the Government effectively gives its donors more taxpayer funds, firstly by cutting their tax rate, then by increasing taxes on the rest of us to pay for it.