Recently, Labor Senator Sam Dastayari claimed there are 10 companies that have an “unprecedented concentration of corporate influence” in Australia, to the point where it has stifled proper democratic and economic progress.
“Four banks, and we all know who they are – the Commonwealth Bank, NAB, Westpac, and ANZ – three big mining companies, in Rio Tinto, BHP Billiton, and Fortescue Metals, you’ve got your two big grocery chains, and you’ve got your big telco, which is Telstra,” Mr Dastyari said.
“The entire political debate has become so dominated by the interests that they’re pushing, and the agenda that they’re pushing. And [we’ve] ended up with this complete crowding out of a proper political discourse in this country because there is one sectional interest that is so much louder than every other voice out there combined.”
Nowhere is this more evident than in the push to reduce the company tax rate, the claim being that it will encourage greater investment and hence create jobs and growth.
In December last year, the Australia Institute released a paper which evaluates the arguments for cutting the company tax rate.
They found that a reduction in company tax to 25 per cent would give Australia’s top 15 listed companies, who pay about one third of total company tax revenue, a benefit of over $58 billion over the 10 years from July 2016.
“For the big four banks a reduction in company tax to 25 per cent would mean a benefit of $2,019 million in 2016-17 and $29,711 million for the decade starting that year. The Commonwealth Bank alone would receive benefits worth around $623 million in 2016-17 and a staggering $9,159 million over the decade.”
The banks are already making superprofits but this has not led to greater investment or more jobs – quite the reverse as we see branch closures, jobs slashed and internet banking become the norm. The Commonwealth Bank receives something like 5 per cent of the taxable company income in Australia but makes about 0.2 per cent of all private investment in Australia.
Mining companies are also laying off people hand over fist. World prices for commodities, a changing demand for energy mix, and the strength of the Aussie dollar are far more influential than tax rates in mining investment. On 2015 figures, BHP Billiton and Rio Tinto, two of Australia’s biggest coal miners would stand to gain almost a billion dollars per annum ($933 million) with a company tax reduction to 25%. If their average profits over the next decade are around 2015 levels then their gain would be $9.3 billion.
Likewise with the grocery chains who are moving to self-serve checkouts or ordering online. Local producers are paid a pittance or undercut by imports. The Coles/Woolworths duopoly means the investments these two make tend to be related to their attempts to gain advantage over each other through strategic property purchases and the like. Woolworth’s annual reports suggest its cash flow is more than sufficient to finance the investment and property development it undertakes.
There is no question that we could do with investment in telecommunications but the Australia Institute described Telstra as “a big and lazy monopolist that has been happy to do just enough to maintain its monopoly but has failed to keep up to date with world best practice in, for example, internet speed.” They made $4.23 billion in net profits during the 2015 financial year and the new CEO has announced that Telstra will invest as much as it needs to win in the mobile space. It is hard to see how increasing their monopoly will provide jobs.
“None of the big 15 companies are likely to be big innovators or investors in the near future and it is hard to see what investment or any other return Australians would receive in return for the $58,075 million gift.”
Almost half of the reduction in company tax would be recovered through a reduction in franking credits through the dividend imputation system. The 10 year $58,075 million benefit to the top 15 listed companies would be a net cost to the budget of $26,715 million.
“Australian shareholders see no difference in their after tax position so it is hard to imagine that the ultimate company owners would perceive any increase in the incentive to invest or innovate.
In the case of foreign shareholders many will likewise receive no change in their incomes but foreign tax authorities are likely to gain at the expense of the Australian tax office under the double tax agreements Australia has with many countries in the world.”
Company tax rates buttress the personal income tax system by reducing the avoidance that takes place through disguising personal income as company income. If the gap between the top marginal rate and the company rate is too large, it encourages the wrong behaviour.
According to the Liberal Party, “The Menzies period is recognised as a golden era in Australia’s history with widespread prosperity, a flourishing economy and work for all.”
It is worth noting that, under the Menzies Government, the tax on companies varied from 45 to 49 per cent and the marginal tax on the top income earners was 75 per cent.
Recently the IMF Managing Director, Christine Lagarde, said:
“Our research shows that, if you lift the income share of the poor and middle class by 1 percentage point, then GDP growth increases by as much as 0.38 percentage points in a country over five years. By contrast, if you lift the income share of the rich by 1 percentage point, then GDP growth decreases by 0.08 percentage points.”
As any business executive will tell you, when your customers are hurting, your business is hurting. With interest rates at record lows, the problem is not that companies need cheaper capital or more cash with which to invest. The problem is that the customers have less disposable income, so there’s no reason for companies to invest cash, because it won’t produce a return.
In reality, it is not investors and entrepreneurs who create jobs but a healthy economic ecosystem.
We could do worse than to emulate one of the great historical innovaters, Henry Ford, who believed our super-rich and profitable companies must share more of their vast wealth with their rank-and-file employees both to increase their buying power, stimulating demand, and to reduce employee turnover thus reducing recruiting and replacement cost.
Taxes can never make a profitable business unprofitable. If we are trying to encourage certain behaviour – investment, innovation, and employment – then, rather than reducing the company tax rate to increase profits for shareholders, we should provide targeted incentives to companies who do invest in Australia and employ more people or engage in worthwhile research.
[textblock style=”7″]
Like what we do at The AIMN?
You’ll like it even more knowing that your donation will help us to keep up the good fight.
Chuck in a few bucks and see just how far it goes!
Your contribution to help with the running costs of this site will be gratefully accepted.
You can donate through PayPal or credit card via the button below, or donate via bank transfer: BSB: 062500; A/c no: 10495969
[/textblock]
