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Rhetoric disguised as research: 10 reasons The Australia Institute is wrong about tax cuts

Friday, 23 February 2018

Rhetoric disguised as research: 10 reasons The Australia Institute is wrong about tax cuts

It’s hard work trying to prove that lower corporate tax cuts are bad for the economy. Luckily, the truth is simpler, says Spiro Premetis.

Our initial response to The Australia Institute’s argument against corporate tax cuts was dismissive. We thought it lacked economic analysis and substance. We spoke to our economist mates around the traps and they agreed. Should we waste time rebutting such flawed work?

But when Australia Institute chief economist Richard Denniss took a victory lap in The Australian Financial Review, saying the Business Council of Australia had “lost the battle of ideas to a small think tank”, our response could wait no longer.

Unfortunately, as the old expression goes, a lie can travel halfway around the world while the truth is still putting on its shoes”.

Unless the business community, economists, economic commentators and politicians stand up to rhetoric disguised as research, Australian living standards will go backward. Here are our responses to The Australia Institute’s shabby top ten ‘reasons’ to say no to a company tax cut.

Claim 1: “Giving business a $65 billion dollar tax cut means billions of dollars less for schools, hospitals and other government services. Giving business a $65 billion dollar tax cut means billions of dollars less for government services like schools and hospitals. Treasury modelling even assumes these company tax cuts will be matched by cuts to government services and higher taxes on people instead.”

Treasury has modelled three outcomes - cutting expenditure, raising personal taxes and raising broad-based taxes. In other words, “cuts to government services” is only one option considered. Even if the government did choose this option, it would not include “billions of dollars less for schools” because the federal government’s education budget is locked in by the Gonski reforms. This doesn’t stop the Australia Institute pulling its supporters’ heart strings, though.


Modelling has further found that for every $1 of cost to the government budget, the company tax cut provides a gross benefit to consumers of $2.39 in the long run.

Treasury’s budget estimates show there will not be any personal tax increases once the tax-to-GDP ratio hits 23.9 per cent.


Treasury further notes: In the absence of this assumption, the underlying cash balance is projected to reach a surplus of 1.6 per cent of GDP in 2027-28. This would be unrealistic, as unconstrained revenue projections imply constantly increasing average tax rates on personal income.”

The budget is already going to surplus in 2020-21 with tax cuts included, so why does the Australia Institute want to frighten its followers with an imaginary proposal for personal tax increases?


Claim 2:The big four banks get an extra $7.4 billion dollars. srsly? Australia’s big four banks are some of the most profitable banks in the world and are the big winners here, getting an extra $7.4 billion dollars in the first 10 years of the tax cuts when they’re already making record profits. By the 2025–26 financial year, the tax cuts for the big four banks will be $3.2 billion each year.”

Put simply, the Australia Institute is saying we shouldn’t give anybody a tax cut because it might benefit the banks. All corporate taxpayers should be treated equally under the law to the greatest extent possible with respect to corporate tax and its application. The Australia Institute implies that Australian banks should be singled out for different tax rates.

Economists usually talk about a number of key attributes that a tax system should have, and The Australia Institute has mentioned none of these:

  1. Economic efficiency: the tax system should not interfere with the efficient allocation of resources.
  2. Equity: the tax treatment should be equitable in its relative treatment of individuals.
  3. Administrative simplicity: the tax system out to be easy and relatively inexpensive to administer.
  4. Flexibility: the tax system out to be able to respond easily (in some cases automatically) to changed economic circumstances.

Having different company tax rates for different types of companies or companies of different sizes (which is the situation Australia faces if company tax reform is not applied to all companies) would introduce distortions in the tax system that would lead to economic inefficiencies and the misallocation of resources. It wouldn’t treat all businesses the same, so how would it be equitable?

But, for the record, the Australian banking industry pays the most corporate tax of any industry in Australia already. In 2016, a total of $22.4 billion in tax was paid by companies listed on the ASX 200. The seven companies classified as banks1 paid $12.4 billion or 55 per cent of all tax paid by the ASX 200, $12.4 billion in 2016.

Further, Australian banks benefit investors. On average, the banks pay 80 per cent of their profits to shareholders.


Claim 3: “The big winners are tax avoiders and foreign shareholders. The big winners from the company tax cut are tax avoiders and foreign shareholders. The benefits of the company tax cut mostly go to foreign shareholders, not to Australian shareholders due to Australia’s dividend imputation system.”

The Australia Institute want to discuss cashflow, and not incentives. But you can’t unlink the two. Company tax cuts work because they benefit the marginal investor by improving their after-tax return on investment.

Foreign investors are often characterised as the “bad guys”. In fact, they lend us money and invest in our economy. This investment could be in new capital goods, workforce education, new business opportunities or organisational improvements. Lower corporate taxes make all this more attractive. If they don’t invest here and pay taxes, the burden is passed on to workers.

What the Australia Institute doesn’t tell you is that every cent of corporate tax implies higher prices, lower wages, and lower payments to shareholders.

The reference to dividend imputation is a red herring. The economic model (called CGETAX) underpinning the result of a real wages gain of 1.0 per cent after corporate income tax cuts takes Australia’s dividend franking system into account and still gets this result (as does the Treasury modelling).

In fact, CGETAX considers the six main channels (four positive and two negative) through which a lower company tax rate will affect the economy:

  • It stimulates business investment, leading to higher productivity and more tax revenue.
  • This higher productivity pushes up real wages, encouraging more labour supply.
  • A lower company tax rate reduces the incentive for multi-national companies to shift their profits offshore, helping Australia to claw back some lost company tax revenue.
  • It reduces the value of franking credits, adding to government revenues from taxing dividends received by individuals and superannuation funds.
  • On the hand, a lower company tax rate does not stimulate investment if foreign investors receive a tax credit for Australian company tax in their home country – but this only applies for 5 per cent of company tax.
  • Lower company tax on so-called economic rents associated with lack of competition, minerals or land won’t stimulate additional investment either.

The Australia Institute is just selling xenophobia about foreign investors exploiting the growing Australian economy.


Claim 4: “Are Coles or Woolies going to hire more checkout staff if they pay less company tax? Don’t think so. Paying less company tax isn’t going to convince Coles or Woolies to hire more checkout staff, is it? There is no correlation between lower company tax rates, employment, or economic growth. Common sense shows this, and historical and international data confirm it.”

What high-level analysis did the Australia Institute use to support the claim that “there is no correlation between lower company tax rates, employment, or economic growth”? A graph.

The Australia Institute’s conclusions fail basic statistics and certainly would not be published in any economic journal worth its weight. They doesn’t control for other relevant variables. Nor do they account for announcement impacts. In fact, this is not analysis.

If corporate taxes were lower, it would make opening new supermarkets more attractive for foreign chain Aldi. Coles and Woolies too would be tempted to invest more. All new stores would require staff. Consumers, meanwhile, would also get the flow-on benefit of more competition.

Again, the The Australia Institute is trying to present a strawman argument to distract from the underlying economics of how incentives work in the economy.

“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,” says Professor Richard Holden of the University of NSW.

Just ask yourself this question: If company taxes really have no impact on employment and economic growth, then why not raise them to 99.9 per cent?

Common sense says the exact opposite. A higher tax on investment will reduce investment.


Claim 5: “Companies do business in Australia because they want to do business in Australia. Foreign investment isn’t dependent on the company tax rate. In fact, most of Australia’s foreign investment comes from countries with lower tax rates.”

There are two assertions here. One, that the rate of return on an investment doesn’t impact the decision to make it – so investors don’t care about after-tax returns; and two, because countries with lower tax rates invest in Australia other factors influence the decision to invest in Australia.

Companies invest on a risk-and-return basis – but ultimately, they are seeking to make a profit.

So we know that corporate tax impacts incentives, a point which we hope you can see by now the The Australia Institute fundamentally does not understand.

And countries with lower tax rates that invest in Australia may have a surplus of savings in their country (that is, they have a current account surplus, not a current account deficit like Australia) and so are looking for active opportunities to invest overseas to make use of their excess savings.

For example, Singapore, Korea, and China all have current account surpluses, they all invest in Australia, and the all have a lower company tax rate than Australia.

Australia, is chasing global capital because we have a current account deficit (that means we spend more than we save domestically, which isn’t a bad thing).

There are many good reasons to invest in Australia - we are a relatively stable democracy and have vast mineral resources. But there are disincentives too. We are a small economy spread across a large continent. We are not the only country in the world with a smart and well-trained labour force. If we can’t differentiate on quality, we must differentiate on price. That is, lower corporate taxes.

Yesterday, Citi Australia  CEO David Livingstone said: “The United States is by far the largest foreign investor in Australia with $860 billion of direct investment, accounting for more than a quarter of total foreign investment in this country. A recent research paper by the United States Study Centre at Sydney University found that US firms account for more than 335,000 jobs in Australia and invest more than $1 billion in research and development here every year. US-headquartered companies now have, for the first time in decades, an incentive not just to invest more in the US, but also to review their global investment destinations based on relative tax rates. So there is a great deal at stake for an economy like ours with such a reliance on long-term US capital.”

The current US investment in Australia - $860 billion - was made while the US had a higher tax rate. The US now has a lower corporate tax rate than Australia. Whichever way you cut it, the The Australia Institute’s claim that “most of Australia’s foreign investment comes from countries with lower tax rates” is misleading. It ignores the warning that Australia has suddenly become a lot less attractive to US companies.


Claim 6:Just 15 companies will get a third of the benefits from the company tax cut. Most of these companies are huge players in markets with few competitors (e.g. telecommunications, supermarkets), and therefore unlikely to change their hiring practices due to the tax cut.”

The assertion here is that the only benefit from a tax cut is the cash flow impact and that it is unequally distributed. But the benefits are spread equally across all businesses. It’s a reality that larger businesses will receive a larger cashflow benefit because they have more customers, do more transactions, have more profit to tax (on average). The benefits are proportional to the size of the company.

Again, the The Australia Institute is using rhetoric and misleading statistics to distract from the fundamental point that company tax reform will improve the incentives in the economy to invest.

These incentives will create other benefits that impact the entire economy, including higher productivity, higher wages, and more jobs. The full benefits from the economic modelling are outlined in our response to Claim 1 (above).


Claim 7: “There’s better ways to create jobs and help the economy. There are way more cost-effective ways to create jobs and help the economy. Studies show that investing in schools and education is more likely to help the economy than giving businesses a company tax cut.”

The Australia Institute asserts there is a better way to create jobs and help the economy in a more cost-effective way, but what is it? Greater investment in education is “more cost effective”… where is the analysis backing up this claim?

If they provide it, it needs to compare the costs and benefits of tax reform to other reforms, such as education, not just say that education is good. We already knew that.



Claim 8: “The benefits are based on farcical assumptions (to put it lightly). The idea that cutting the company tax rate would suddenly cause multinational corporations suddenly stop avoiding tax is ridiculous (optimistically known as a ‘morality dividend’.) This is just one of the bizarre assumptions in the economic modelling that claims to show company tax cuts help the economy.”

The modelling aligns with empirical results. Modeller Chris Murphy disagrees with the assertion that the benefits are based on “farcical” assumptions.“The Australia Institute has also ridiculed as a ‘morality dividend’ the idea that a lower company tax rate reduces shifting of profits offshore. In fact, the sensitivity of the company tax base to the company tax rate has been the subject of extensive international research over the last decade. That research is consistent with the sensitivity built into CGETAX and rejects the idea that this effect does not exist.”

We’d like to see The Australia Institute put their model and framework down in some algebra (this is getting serious - an economist is asking for a framework and some algebra) because we think the debate should be at a higher standard, not using back-of-the-envelope pseudo economics.

What is The Australia Institute’s framework for how the economy works? If it even has one, it should be prominently attached to this critique of corporate tax cuts.

As Richard Denniss himself says: “Selecting what kind of model is to be used to evaluate a policy proposal will inevitably have an impact on the way that the results will be framed and perceived.”


Claim 9: It’s not even worth it. Even the Government’s own economic modelling shows that the benefits are tiny and over 20–30 years away. By then, we’ll have lost over $100 billion dollars that could have been spent on schools, hospitals, and other government services.

As with our criticism of Emma Alberici’s analysis article last week, this reveals a significant lack of understanding.

A 1 per cent improvement in GDP is not “tiny”. And we’ve seen in the US that corporate tax cuts provide immediate benefits in the form of higher wages and announced investment plans.


Claim 10: And finally… Voters don’t want the government to do it. (only big business does — funny that).

The Australia Institute assert that polls trump economics. Speaking of Trump, the US had the same poor polling about company tax cuts prior to them being implemented – but things changed quickly once they were implemented and people could see the benefits – like a whole bunch of companies deciding to pay higher wages, and firms deciding to invest more in the US economy.

In December, as the tax cuts were being implemented, 46 per cent of Americans approved of them. By early February, this had risen to 51 per cent.


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