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In good company: Tax cuts make more sense than ever

Friday, 02 February 2018

In good company: Tax cuts make more sense than ever

Humanity's relentless quest to improve life has found a new, more relevant cause, writes Fred Pawle.

Last year's great leap forward, the passing of amendments to the Marriage Act, dominated our national debate in ways that only dramatic changes can.

With that debate over - at least until the government's panel of experts report on religious exemptions next month - the collective gaze has settled upon the prospect of tax cuts for companies. Treasurer Scott Morrison has already proposed reducing the rate to 25 per cent by 2026, although this is not enough, says the MRC's Research Director Spiro Premetis.

Donald Trump is not the only person proving that lower corporate taxes rates benefit workers and the economy.

A report in the American Economic Review this month analyses the corporate tax situation in Germany, where, thanks to a unique taxation structure, companies are like mice in a lab experiment designed to measure the altruistic nature of the corporate structure.

The corporations emerge from the experiment with the cheese shared between all involved, although not always evenly.

Two types of taxes apply to companies in Germany: federal and local. The local taxes are imposed by municipalities, the lowest of Germany’s four levels of official jurisdictions. There are 12,000 municipalities, and between them they made 18,000 changes to their tax rates from 1993 to 2012, the period investigated by the report.

From the mass of data related to these taxes, the report’s three German authors were able to extract information that factored out general trends and identify not just how much tax cuts are passed on to workers, but which ones.

They found that about 51 per cent of a company’s tax burden was borne by the workers. Reductions in corporate taxes were therefore always passed on in part to the workers.

The burden of increased corporate taxes, however, was not always evenly shared. “Higher taxes reduce wages most for the low-skilled, women, and young workers,” the report found.

The authors also said that collective bargaining at the firm level worked better than collective bargaining across a sector or individual bargaining.

Writing in The Australian Financial Review under the headline “Cutting Australia’s corporte tax rate will cut inequality” , economist Richard Holden said: “The best, most credible evidence we have suggests that a cut in the Australian company tax rate is not a gift to the big end of town.”

This should hardly be surprising. Contrary to what Labor and the union movement believes, corporations are designed to benefit employees, not exploit them. A corporation with below-rate wages, low morale and limited opportunity will soon lose its workforce.

Donald Trump’s State of the Union address this week emphasised the pact between employers and employees. Trump invited the owners and an employee of a manufacturing business from Ohio to Congress for the address. “Because of tax reform, they are handing out raises, hiring an additional 14 people, and expanding into the building next door,” Trump said. About 3 million workers had received “tax cut bonuses,” he said.

Would the same apply here? Not necessarily, said Simon Benson in The Australian.

The swiftness with which corporate America responded with wage bonuses suggests that there may have been private pre-commitments secured by Trump on the basis of a moral obligation to share the dividends of the cuts,” Benson writes.

“Turnbull does not have this or any commitment even remotely like it, other than abstract suggestions by some of our larger employers that they would be inclined to employ more people if the tax rate was cut.”

Trump’s triumphalism is backed by results showing sustained growth in the US and even improving global growth, as reported by the IMF.

But to pay for the cuts, the US economy needs to increase growth to 4 per cent, a level that would seem ambitious for an ageing population. Either that or Trump is planning to follow up the good news of tax cuts with the bad news of expenditure cuts further down the track.

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