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Tax Cuts Do Not Create Jobs

Corporate tax cuts do no create jobs. It is important to understand this very simple, very obvious fact no matter what #alternativefacts you see.

The Liberal government, and their owners in the CEO-union, the Business Council of Australia, are revving up a PR campaign to spread their lies, the likes of which we haven’t seen since billionaire miners stood on the back of utes wearing pearls, pretending like they’d met their workers before. And it’s up to us: you and me and everyone you talk to about this very fact, to refute this claim until we’re tired of refuting it, but we’ll keep going because it’s seriously important to all of us.

Let’s make something clear. The Liberals and the Business Council know they are lying when they say tax cuts create jobs. That’s a given. But they have to come up with some excuse for this policy other than campaigning on a platform of more-yachts-for-CEOs. So they lie.

When you think about it for more than a millisecond, it’s not hard to see why a tax cut puts more money in the pocket of business owners and executives, but certainly does not create more jobs. Nor do tax cuts increase wages. They could increase wages if employers chose to divert the money left over from paying less tax into higher wages. But that’s like saying a dog could break their bone in half and give the other half to the cat. Possibly, but never happens.

In order to give you a real-life example of why tax cuts neither create jobs, nor encourage bosses to give their workers a pay rise, I will use the ready-made example so helpfully provided by the Business Council of Australia’s clearly out-of-their-depth PR people:

This young bartender, who incidentally is apparently working at The General Havelock in Adelaide, supposedly looks forlorn at the thought that there will be ‘fewer job opportunities around here because of high company tax’. I’ll give you a moment to compose yourself from laughing before reading on. In fact, Australia’s company tax rate is ‘not markedly out of line with the G7 countries’, but you already know the Liberals and the Business Council lie, so we’ll move on.

Let’s assume the bartender is worried there will be fewer jobs in the bar because the owners of the bar have to pay too much tax. We’ll break this idea down. Hypothetically, let’s imagine the General Havelock owners get a 2.5% tax cut, as promised by the Liberals in their Enterprise Tax Plan. That means, at the end of each month, when their accountants add up how much revenue has come through the till from selling alcohol and food, and emptying tens of thousands of dollars out of their pokie machines, and then take out the costs, which include wages, they then have a look at their profit and take out 27.5% to give to the ATO, rather than the 30% they used to pay. The accountant says to the owner, ‘good news, you’ve got more to take home this month because less has gone to the tax man’.

Now, I’m sure you can see this scene in your minds eye. You can see the accountant handing the owner the piece of paper to show the extra cash that is coming into the bank. How realistic is it to think this scene will choose-it’s-own-adventure down the path of the owner pocketing the extra cash and spending it on his own private consumption, such as a new luxury vehicle, another set of golf clubs, maybe put it towards a holiday home or an investment property. Or, will he turn to the accountant and say, ‘gee, I’m so pleased with this tax cut, I can now finally afford to hire two extra staff and grow my business’. Let that one settle for a second.

Even in this strange parallel universe where the General Havelock owner puts his 2.5% tax cut into the pay checks for new staff members, in this la la land that doesn’t exist, think about it, why does he need those two extra staff members? Why, if his bar is already running smoothly, making him enough profit that he noticed a 2.5% tax cut, and there are enough people working behind the bar like this glum looking girl, pouring beers, and there are enough cooks in the kitchen, and security guards on the door, and staff to make sure the people in the pokie lounge never get tempted to go home, why if all that’s working fine, would a tax cut go into hiring more staff? And if there was a need for more staff, because there were more customers in the bar than the bar staff could possibly serve, why hasn’t the all-knowing business owner already hired more staff to meet this demand?

Still not convinced? When was the last time you saw an ad for a bartender, maybe on Seek.com.au or on a little sign behind the bar, which said ‘bar tender job available, spending the tax-cut, enquire within’? You didn’t see this sign, because it never happened. What you do see, in reality, is the obvious reason for a job ad to exist: ‘bar tender job available, enquire within’ and when you enquire within, the job is available because a) there are too many customers (demand) and not enough people to serve them in order to make profit for the business, or b) the bar tender who used to do the job no longer does.

This is the reality for a reason. Because CORPORATE TAX CUTS DO NOT CREATE JOBS. Say it with me. Thinking otherwise is either a massive misunderstanding about the fundamental relationship between worker, boss, profit and tax, OR is a bald-face lie. So which do you think the Liberals and the Business Council will more likely own up to?

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29 comments

  1. Cliff

    No one hits them with this question(especially CPG) “With three quarters of the companies not paying tax why do they need a tax cut?”

    Paying zero tax is a pretty good tax cut.

  2. passum2013

    More proffet to send overseas to the Cayman Islands etc For The Extreme wealthy that already wrought the Tax system

  3. andrew moran

    One of the figures being bandied around is that it will add 1% to GDP (eventually).
    Why would you hand out $50b for a 1% return? It defies belief or it should. But given the morons flogging the idea you probably shouldn’t be surprised.
    As for the rest of Turnbull’s drivel, recent TAI research shows that for the crap it is.
    My local LNP MP disappears very quickly when I ask him about this.

  4. Harquebus

    “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.” — John Kenneth Galbraith

  5. Kate Ahearne

    Thanks, Victoria, A terrific example. Worked through very nicely.

  6. Glenn K

    What does create Jobs and Growth is government policy, through vehicles like regulation, taxation, subsidisation, etc. Turnbull and the LNP love to insist that government do not create jobs, the market does. Then through the other side of their mouths, they say “oh but this tax cut (government policy) will create jobs.” What complete bullshit. This government policy (tax cuts) will increase the wealth divide and lead to smaller government (ie less services), which of course is the LNP objective all along. Remember… it’s about “individualism” – whatever the hell that is supposed to mean – perhaps it means it’s a dog eat dog world and ain’t no-one gonna help you out. Unless of course you are an LNP pollie sucking off the teat of the public purse.

    Government policy is what creates jobs and growth. Full stop.

  7. Steve Laing - makeourvoiceheard.com

    Totally agree. If this business tax cut was so wonderful, why hasn’t the economy seen an improvement since they gave one to small businesses a year and a half ago. Surely SOMETHING must have happened by now. The fact that no improvement has occurred, indeed it has got worse, suggests that it had absolutely no positive effect at all.

    Why aren’t journalists asking this question? Where is the evidence that company tax cuts create jobs, particularly given that there has already been a tax cut but NOTHING good seems to have come from it.

  8. jim

    Geez haven’t the LNP stole enough money from the our society yet (closing down NGOs everywhere etc…etc..) Tourism is an $8 trillion industry, the largest in the world, eclipsing mining, coal, entertainment and fossil fuels all put together. There is no business sense in destroying the biggest tourist drawcard, natural scenery and biodiversity, for an industry that has a forseeable end. The jobs created, investment opportunities, and endless income-producing opportunities are available if you look, and take the true leadership stance to ensure its survival. Future-thinkers are few and far-between these days, be the ones to create a true, lasting legacy and ensure a future for your country. Thank you.

    The Fossil fuel industry in Australia is subsidised for about $10billion a year every year, renewable energy a fraction of that.

  9. Matters Not

    Businesses create jobs only when demand for goods and services cannot be met via ‘existing arrangements’, broadly defined to include labour power, technology and the like.. Further, they need to believe also, that such growth in demand will continue into the future.

    On the other hand, businesses will shed labour power, rather than technology, when a ‘downturn’ is current or predicted.

    The notion that any business will ‘invest’ because there is more money in hand is laughable. And stupid. Demand (current or predicted) is the only motivating force.

    But it’s what most punters believe that counts in political terms.

  10. kathysutherland2013

    I have a friend who owns a small business – she makes and sells cakes for weddings, celebrations etc. She tells everyone she doesn’t want a tax cut; she wants the people to have more money so they can buy her cakes! That’s the only way her business is going to grow.Such an obvious point, but so many people must don’t get it.

  11. David Grace

    Imagine another scenario for that “tax cut”…The Government says that we will make $50b available to create infrastructure, ensure every child is well educated, and provide housing and guarantee that everyone who wants a job doing this, will have one..properly paid, no “work for the dole”…that money created by the Government, because they are the monopoly providers of Australian currency, flows into the economy. The people who are employed building houses, providing education, and building bridges have money to spend in small businesses, as they buy their groceries, decorate their houses, buy small luxuries, so that money spreads into the private economy so it grows as well…everyone wins.

  12. Peter F

    @ Cliff “No one hits them with this question(especially CPG) “With three quarters of the companies not paying tax why do they need a tax cut?”

    IF they are not paying any tax, surely they have already produced thousands of jobs, thereby proving the Government’s proposition……… The crows will be flying backwards through that bulldust.

  13. Kaye Lee

    The thing that very few people point out is that, because of dividend imputation, for Australian tax residents, the company tax rate is irrelevant from an investment perspective. They are taxed on company income at their own marginal tax rate making up the difference between the 30% already paid. If the company tax is lowered, their income tax goes up (unless they earn less than $37,000 in which case their refund goes down).

  14. Kaye Lee

    Another thing that is rarely mentioned when comparing Australia’s tax rates is that, unlike most other developed countries, Australia does not levy social security contributions.

    “In OECD countries, social security contributions on average comprise one quarter of total taxation, but make up over 40 per cent of total taxation in some countries (such as Japan and the Netherlands),”

    They include payments towards unemployment benefits, accident, injury and sickness benefits, old-age and disability pensions and the OECD publication notes that contributions can be levied on both employees and employers.

  15. Kate Ahearne

    Kaye, I didn’t understand what you were saying about dividend imputation, but never fear, Professor Google is here! But what you say about social security contributions. In Australia – Our social security contributions are included in our tax, whereas other OECD countries appear to have lower tax but have the separate social society contribution as well as the income tax. Is that it?

  16. Clean livin

    Tax cuts to business MIGHT produce more jobs, however employing people in business WILL give you a tax cut in the form of a deduction.

    If we want to give business a tax cut, TIE it to their increased employment.

    Business employees extra workers, business gets a BONUS tax deduction, based on the numbers employed.
    Easy!

    Even Scomo and big Mal should understand that, along with the punters!

  17. Kaye Lee

    Dividend imputation means, when you get your dividend on shares, there has already been some tax paid on it by the company – the investor has to pay their normal marginal rate on income so if they are on 47% and there has already been 30% paid at the company level, they only have to pay another 17% on that portion of their income. If company tax is dropped to 25%, the investor will have to pay 22% on that portion of their income. They will be no better off. But because foreign investors are not subject to this system of dividend imputation, they will reap the benefit of the tax cut.

    As for social security, what you said is basically correct, Those things are paid for out of general revenue (and superannuation guarantee) here whereas other countries have predicated funds specifically to cover stuff.

    John Daley, CEO of the Grattan Institute, an independent developer of public policy, told Fact Check social security contributions in other OECD countries were a payment made by taxpayers to the government that could be drawn down on at a later date in the form of, for example, unemployment benefits or the aged pension.

    “Obviously there’s a distinction between income tax and social security contributions [in the OECD] but to a large extent it is essentially just labelling,” he said.

    John Freebairn, professor of economics from the University of Melbourne, told Fact Check that you could argue that social security contributions were different from income or payroll tax that went straight into consolidated revenue because they were a “defined benefit”.

    “[But] in essence they are not different,” he said.

    Michael Dirkis, a professor of law at the University of Sydney told Fact Check social security contributions were based on income and if they were compulsory, they were a tax.

    He said it was a “furphy” to compare countries only based on income tax, and comparing direct versus indirect taxes was better.

    http://www.abc.net.au/news/2015-11-17/fact-check-tax-rate-vs-the-oecd-scott-morrison/6925134

    https://data.oecd.org/tax/social-security-contributions.htm

  18. Kaye Lee

    Clean livin, there is merit in what you suggest but we do the opposite with payroll tax (which is payable if your annual wage bill exceeds a certain threshold). Also, the deduction the employer receives is only at their marginal rate so it will still cost more to employ someone which, as has been pointed out, they aren’t going to do unless there is increased demand.

  19. Harquebus

    Kaye Lee
    Thanks for that information. A couple of things there that I was not aware of.
    Much appreciated.
    Cheers.

  20. Kate Ahearne

    Wow, Kaye. You’re a National Treasure.

  21. crypt0

    Given the large %age of companies and wealthy individuals who already pay ZERO tax, how on earth are they going to be advantaged by this adjustment to the tax rates ???
    Seems so unfair.
    Stand by for the LieNP govt. to slash a few programs from welfare, unemployment etc. and simply make an annual cash payment to these bludgers, who are probably crying “discrimination! ” at this very moment..
    It’s the Liebral way.

  22. jimhaz

    More Than 90% Of US Businesses Don’t Pay The Corporate Income Tax
    http://www.forbes.com/sites/timworstall/2014/12/23/more-than-90-of-us-businesses-dont-pay-the-corporate-income-tax/#34a6c36e52c4

    The Truth About Corporate Tax Rates
    http://www.forbes.com/sites/taxanalysts/2015/03/25/the-truth-about-corporate-tax-rates/#8a5420a20a54

    Offshore Corporate Profits: The Only Thing ‘Trapped’ Is Tax Revenue
    https://www.americanprogress.org/issues/economy/reports/2014/01/09/81681/offshore-corporate-profits-the-only-thing-trapped-is-tax-revenue/

  23. Kaye Lee

    A nation’s economic, cultural and political landscape have a lot more influence on international investment decisions than tax rates do. Stability means a lot as does an educated, skilled, healthy workforce and a robust legal system.

    A couple of other points…

    The greater the disparity between the top marginal tax rate and the company tax rate, the greater incentive there is to become a company and pay the lower rate on earnings.

    Also, the higher the company rate, the more incentive there is to reinvest to lower tax payable.

    And someone should be mentioning family trusts but that’s unlikely as most of our politicians use them.

  24. Greg

    It’s been tried and tested for decades and NOTHING …. only ceo’s getting massive pay rises and payout’s , as for jobs ..mm may be for 1 or 2 extra people in the rhetoric department to spin doctor why hundred’s of jobs had to go over sea’s

  25. Divergent Aussie

    The hotel owners are unlikely to pay company tax as it doesn’t make any sense to do so. Whatever is left over as profits will be paid to the owners directly which will be taxed at personal income tax rates. The company will thus have zero income to pay company tax on. The only companies really affected by company tax are large listed companies with shareholders. They have to pay company tax in order to be able to pay dividends. I’ve commented on this previously. This whole company tax thing is a complete red herring. Small businesses would rarely be in a position to be paying company tax in the first place so paying such tax would certainly have no bearing on the barmaid’s employability in this example. So it would benefit large corporations but would it affect their decisions about labour? Low taxing jurisdictions don’t necessarily have high demands for labour. The Cayman Islands has a very low company tax rate and many large corporations are headquartered there but this is not where the business activity is. The business activity is where the demand for the business is and or where labour costs are low. Thus the demand for labour follows this business activity. Just because company tax is low in the Caymans does not mean this is where all the cars are made. All the cars get made where conditions are favourable for car production such as materials and labour. In the case of labour, labour is something which is frequently being replaced by automation. So the company is located in a tax shelter and then through transfer pricing gets the best deal for the products it sells maximising return to investors.

  26. Oliver Olsen

    Kaye lee….while the company tax rate is being dropped ..there is no discussion that I am aware of to drop the imputation rate applicable on dividends…so a company can still frank a dividend at 30% if it has the franking credits available.

  27. ace Jones

    Thanks, Victoria, you cover it so well that I too might have a chance of helping the blind see again with such simple irrefutable facts explaining the facade of CTC . companytaxcuts feed the Beast.

  28. Kaye Lee

    Oliver, franking credits are a credit for the tax already paid by the corporate tax entity so if the company pays a lower rate, the franking credits must automatically reduce I would have thought.

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