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Instinct versus evidence

It is very telling that, when commissioning modelling for the economic effects of increasing GST and cutting income tax rates, the government didn’t bother getting any such modelling done on reducing company tax rates.

We are just supposed to accept that a cut in company tax rates would be beneficial to the economy and to workers.

Ian Narev, CEO of the Commonwealth Bank of Australia and chair of the BCA’s Economic Policy and Competitiveness Committee, has said: “Instinctively,….if you increase the GST and reduce corporate tax, you are undoubtedly going to stimulate some business investment. That is a clear phenomenon.”

The evidence shows otherwise.

The Australia Institute examined international and Australian data on tax rates and macroeconomic indicators and found no evidence of a link between corporate tax cuts and a ‘growth dividend’.

OECD data shows

  • There is no correlation between corporate tax rates and economic growth in OECD countries.
  • Countries with lower company tax rates have lower standards of living, measured as purchasing power of GDP per capita.

Historical data for Australia shows that

  • Wages and mixed income has declined as a share of GDP as corporate taxes have been lowered.
  • Average unemployment rates have risen as company tax rates have lowered.
  • Growth in foreign investment as a share of GDP was strongest when Australia’s company taxes were highest.

Despite the steady reduction in company tax rates over the period since the 1980s, wages share of GDP has steadily fallen – by approximately 13 per cent.

Between 1950 and 1987, when the company tax rate was 40 to 49 per cent, the average unemployment rate was 3.3 per cent. In the period of 30 per cent tax rates since 1 July 2001 unemployment has averaged 5.4 per cent.

Australia receives a good deal of its foreign investment from countries in Asia and elsewhere that have significantly lower company tax rates.

Rather than just accepting what all the business lobby groups are telling us with no evidence to back up their claim that ‘tax cuts are good’, we should examine what really does promote growth and share the wealth more equitably.

The government has become fixated with startups but the truth is that 90% of them will fail. We have too many venture capitalists making short term decisions looking for a quick buck whilst asking for greater government protection. They should not be the ones influencing government policy because, when their sole aim is to maximise profit, they will never consider what is best for society.

According to TAI, Australia’s golden age of economic growth, 1945 to the 1970s, was backed by full employment policies and investment in infrastructure, education, science and technology.

Rather than company tax cuts, protection for risky investments, and issuing Entrepreneurs Visas, these are the building blocks that government should focus on.

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29 comments

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  1. townsvilleblog

    http://www.afr.com/news/policy/tax-office-to-name-579-companies-that-paid-no-tax-20151216-glp3vc
    http://www.abc.net.au/news/2015-12-17/almost-600-companies-did-not-pay-tax-in-2013-14/7036324

    These companies are the reason that everyday Australians are scratching out a living which is true for 2 1/2 million Australians under this LNP regime. If you have any compassion for your fellow Australian, any humanity for your fellow Australian you will give the LNP the boot on 2nd of July and return a Labore government who have promised to right these wrongs and add approx $50 Billion in revenue to the Australian government, enabling us to boost health and education funding for our families.

  2. townsvilleblog

    Yes Kaye, wages have fallen substantially yet the LNP are advocating for further falls, how are families supposed to survive. i know my small family are doing it really tough now, it has gotten steadily worse over the past 3 years since the rabid right wing of the LNP took control of the federal govt. They have to go this July or we will.

  3. Jennifer Meyer-Smith

    Infrastructure, education, science and technology are the growth and advancement triggers for sustainable communities.

    I would also like to promote the concept of grassroots micro-businesses that allow grassroots people to realise the inception and sustainability of their concepts and ambitions. Sufficient and sustainable government backed micro-finance in the forms of Micro Finance Grants and Micro Credit Loans for any and all applicants, including unemployed and under-employed people, is the way to go to get people into self-employment and out of languishing unemployment.

    The LNP prove their disinterest in supporting languishing unemployed and under-employed people, locally grown industry and innovation by pushing its ‘Entrepreneur Visa’ and suspect ‘StartUp’ funding that suit the needs of the already resourced.

  4. Klaus

    Hi Kaye, your article could have been termed ideology versus Evidence, because that is what keeps the entire LNP blind to actual progress.

  5. Kaye Lee

    Paul McClintock, National Chairman of CEDA and former Secretary to Cabinet and Head of the Cabinet Policy Unit in the Howard government, addressed the National Press Club today about budget repair, suggesting we need to raise taxes, not cut them.

    The CEDA report argued $15 billion in revenue could be raised through a mixture and combination of:

    A progressive superannuation contributions tax, at a 15 per cent discount to the taxpayer’s marginal tax rate ($6.9 billion);
    Marginal tax on superannuation contributions above $10,000 ($8.5 billion);
    Lift capital gains on super fund earnings to 15 per cent ($1.6 billion);
    Halve capital gains tax discounts ($3.6 billion), or reduce by 75 per cent ($5.4 billion), or reduce CGT discount to 40 per cent with no grandfathering ($1.7 billion);
    Cut the fuel tax credit scheme by half ($3.3 billion);
    Raise taxes on luxury cars, alcohol and tobacco by 15 or 20 per cent ($2.3 billion or $3.1 billion);
    Increase petrol tax by 10 cents per litre ($1.7 billion);
    Remove negative gearing on all types of assets purchased after December 2015 ($2.6 billion);
    Remove the Private Health Insurance rebate exemption ($1.8 billion);
    Reduce industry tax concessions across the board by 25 per cent ($1.4 billion);
    Reduce work-related tax deductions ($4 billion);
    Continue the budget repair levy ($1.4 billion).

    http://www.abc.net.au/news/2016-03-29/budget-repair-should-be-driven-by-tax-hikes-ceda/7281422

  6. Miriam English

    It would be nice to tax organised religion too. It would lessen the attraction for con-men and would return some of that much needed money to the community where people are doing it hard.

  7. Kaye Lee

    Even if we just taxed their commercial enterprises which every other country except one does. And I want to know how the IPA qualifies for charitable status.

  8. Miriam English

    Holy cow! That list adds up to more than $40 billion!!!!

  9. Miriam English

    Yes, it would be nice to know how the IPA manage to be a charity.
    Maybe I could manage that trick myself. 🙂

  10. RichardU

    Since wages are tax deductible, why do company tax rates need to be reduced to encourage companies to employ more people?

  11. Kaye Lee

    CEDA wasn’t suggesting implementing all of the list but they show how easily it could be done if the two major parties would just talk to each other and agree.
    They also found that $2 billion in spending cuts could be achieved through one of the following:

    Lower Pharmaceutical Benefits Scheme drug prices ($1.6 billion) combined with a reduction in budgetary assistance to industry by 10 per cent ($0.5 billion);
    A combination of cutting the Private Health Insurance Rebate by 25 per cent ($1.8 billion) and using a higher-education efficiency dividend ($0.3 billion);
    Reducing public sector headcount by 10,000 ($2 billion); or
    Improving the cost effectiveness of treatments in the Medical Benefits Schedule ($2.1 billion).

  12. Gangey1959

    Put a tax or levy or whatever it has to be called on all payments that leave Australia.
    Legitimate payments could be claimed back, but sending profits offshore, or funds transferred to foreign accounts for ‘tax reasons’ would all cop a wallop.
    Religious organisations like the catholic churcs, or the morons, or whoever runs sanitarium (aka parliament) or whoever all need to pay their way in Australia too, even if it is at a reduced rate.
    If ANY organisation makes even ONE political donation they should be excluded from charitable organisation status.
    Take the money first. If Australian’s aren’t meant to have it, let Heaven take it back.

  13. Heterodox (@mmt_rod)

    IPA says make donations out to IPA Research as this is the only part of the IPA that qualifies for charitable status, probably got some shifty way to launder those donations to fund the rest of the IPA.

    CEDA still with the neoliberal groupthink that running surpluses is sustainable, the report is full of misinformation and outright lies.
    McClintock said that 8 yrs of deficit is far too long and should not happen during economic expansion, neglects to mention the 40 yrs of deficits post WW2 that gave us greater economic expansion than we have had in the last 40 yrs with all those coveted surpluses.

  14. gee

    It is not that hard to understand. All farmers know that in order to grow crops, first, you need to feed the soil.

    i would wager the people who own the companies that have benefited most from neo-liberalism and globalisation are the same people whose share of the pie decreased during the 1945-1970 period to allow the share of the 99% to increase.

  15. Lee

    “Lower Pharmaceutical Benefits Scheme drug prices ($1.6 billion) combined with a reduction in budgetary assistance to industry by 10 per cent ($0.5 billion);”

    Just to clarify, is this recommendation for the government to pay less for the drugs on the PBS?

    The government specifies the price it wishes to pay and the manufacturer either accepts it or their drug does not get accepted into the PBS. From time to time, manufacturers do reject the government’s conditions. The government already attempts to bargain for a reasonable price because the less it pays, the further the budget stretches and the more drugs it can afford to place on the PBS. How realistic is this saving?

  16. Lee

    Thanks Kaye. I’d like to see the report but the link inside the article is broken.

    It should be noted that pharmacies are not always open with patients either and inform them that a generic is available. I only learned that for one drug I used to take when I contacted the PBS administration and asked why it was not on the PBS. On another occasion I signed a script and handed over my money before I was told that the product in the sealed paper bag was not the generic I requested.

  17. Lee

    I’ve never had a script marked not for substitution. Thanks for the link.

  18. Wally

    If you want business to employ more people take direct action to achieve the desired result. If circumstances are appropriate give the employer a subsidy instead of giving all business a tax break. And companies like Apple who use tax havens should receive no government subsidies at all. Time for our government to level the playing field.

  19. Jennifer Meyer-Smith

    Hear, hear Wally,

    assuming you include financial incentives to micro-businesses also with reasonable eligibility criteria.

    🙂

  20. townsvilleblog

    Farmers are among the worse tax avoiders where almost everything is tax deductible.

  21. townsvilleblog

    IPA and business have more deductions than Ned Kelly ever had, they legally rob this nation of tens of billions in income taxes.

  22. townsvilleblog

    Wally Quite right don’t give them a tax deduction as a third of them do not pay a cent in tax anyway http://www.afr.com/news/policy/tax-office-to-name-579-companies-that-paid-no-tax-20151216-glp3vc Australia cannot afford to lose the $50 Billion each and every year in tax avoidance, they need to be made to pay with a change of the laws that ensure that there is a floor to their tax deductions, i.e. if their deductions take them below 20% then they should automatically pay 20% of their gross income as a storeman or a shop assistant does, that is the fair way to treat every business.

  23. Kaye Lee

    I do understand and share the angst about businesses not paying tax but a flat rate of income just wouldn’t work. In my business, the sales are well over $1 million pa but so are expenses and I don’t mean dodgy ones, I mean stock, wages, etc. On your scenario I would have to pay about $200-300,000 in tax which is significantly more than I make in profit. Genuine cost of business expenses must be deductible or we go broke and all my employees are out of work.

    We need to crack down on the dodgy financial dealings between different arms of the same company.

  24. Wally

    Kaye Lee

    This is spot on “We need to crack down on the dodgy financial dealings between different arms of the same company.”

    There has to be a method that is simple and effective.

    In regards to energy companies, telcos and the like who employ staff and pay consultancies off shore for work/jobs that could be done locally they should tax the employees as if they were working in Australia without any tax free threshold. It may not stop them using people from overseas to provide technical assistance and the like but at least these people we employ would be paying some tax to the country their employment stems from.

    The likes of Apple are troublesome and that is why they have dodged tax so effectively for a long time. A tax law that added a huge import duty onto goods when they do not arrive in Australia from the location where payment for the goods is going to. For example, iPads arrive from China but the money is sent to Ireland to dodge tax, hit the goods with a huge import duty before it can enter Australia. If Apple had to send goods to Ireland and warehouse them before exporting to Australia it would cost them heaps. I

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