Corporate Australia – the mendicants who want more!

Over the last few months, we have had the Australian Treasurer clogging up the media with his relentless claims that Australia has no choice but to cut corporate tax rates to keep up with the rest of the world (this is after Donald Trump started the ball rolling). The Federal government is trying to eliminate the resistance in the Senate (Upper House) to their proposal to cut corporate rates from 30 to 25 per cent. The Treasurer is a really pathetic figure – a non-economist, mouthing platitudes over and over about matters that he has little understanding and which the research evidence doesn’t support anyway. Then, last week, the ultimate public purse dependents, big business sent the members of the Senate a letter (a sort of blackmail letter) claiming if the Senators stopped blocking the legislation, then their corporations would go on an investment, wage increasing, employment creating binge. It was sickening to read and listen to. These mendicants are trying to convince us that the only thing stopping an investment boom or wage increases is a 5 cents in the dollar tax impost that tax data reveals many of them don’t pay anyway. It was hypocrisy parading as blatant self-interest. These characters have no shame.

Special pleading for more corporate welfare reaches new heights

As part of its special pleading for more corporate welfare, the Business Council of Australia (which represents large companies) sent a letter last week (March 21, 2018) to all members of the Australian Senate, which has been holding up the proposed tax cuts.

At the outset (in the mid-1980s), the BCA membership was the largest companies in Australia. Now it has “130 firms, plenty of them consultants, lawyers, accountants and investment bankers feeding off the original BCA types, investment bankers such as Goldman Sachs and JP Morgan – neither of which paid corporate tax here in the past three years” (Source)

It was signed by the CEOs of 10 largest companies trading in Australia.

The letter claimed that if they agree with the legislation then these companies will increase investment, raise wages and create more jobs.

The letter said:

We believe that a reduction in the corporate tax rate, as proposed through the Government’s enterprise tax plan, is urgent and vital to keep Australia competitive.

If the Senate passes this important legislation we, as some of the nation’s largest employers, commit to invest more in Australia which will lead to employing more Australians and therefore stronger wage growth as the tax cut takes effect.

In its campaign, the BCA claims that corporate tax rates in Australia a very high and onerous.

The facts speak otherwise.

In March 2017, the CBO published = International Comparisons of Corporate Income Tax Rates – as part of its briefing for Donald Trump’s tax agenda.

The CBO uses data from the OECD, IRS and other well-known and transparent data sources.

Summary Table 1 (reproduced below) shows ‘Corporate Tax Rates in G20 Countries’ for 2012.

Australia sits at equal 10th in terms of ‘statutory corporate tax rates’, which “are specified in law”.

But using the statutory rates is misleading because it only applies to the top rate applicable “to each additional dollar of taxable income in the highest tax bracket” and ignores concessions and deductions.

In terms of the ‘average corporate tax rate’, which is “the total amount of corporate income taxes that companies pay relative to their income”, Australia drops to 15th place in the G20 list.

So while the statutory rate is 30 per cent, once all the (corporate welfare) concessions are taken into account, the Australian effective corporate tax rate is just 10.4 per cent.

Who pays tax anyway?

On December 7, 2017, the Australian Tax Office (ATO) released corporate taxation data for the financial year 2015-16 under its – Corporate Tax Transparency – program.

It contains information on (Source):

… the total income, taxable income and tax payable of more then 2,043 entities

They include 1,693 Australian public entities and foreign-owned entities – including privately owned foreign companies – with a total income of $100 million or more

They also include 350 Australian-owned private entities with a total income of $200 million or more

Together their collective income was more than $A500 billion in that financial year.

You will see, for example, that QANTAS AIRWAYS LIMITED with a Total income $A15,754,181,367 with a Taxable income of $A52,432,000 paying ZERO tax.

Its boss signed the BCA letter and has been outspoken in the media in his demands for tax relief for his company – relief from ‘nothing’!

His entreaties have been simpering and self-serving.

Of the other signatories to the BCA letter: Origin Energy (Total Income $A11,917,688,617, Taxable Income $A94,061,718, Zero tax paid) and JBS Australia chief Brent Eastwood (Total Income $A640,358,338, Zero tax paid).

The ABC news analysis (February 13, 2018) – Why many big companies don’t pay corporate tax – pointed out that:

Qantas CEO Alan Joyce, one of the most prominent supporters of the Turnbull Government’s proposed big business tax cut, presides over a company that hasn’t paid corporate tax for close to 10 years.

It also noted that “one in five, of Australia’s largest companies have paid no tax for at least the past three years”.

It also said that:

At a time when Australian households have seen their electricity prices soar, the country’s leading energy retailer, EnergyAustralia … paid no corporate tax for the decade to 2016.

That’s despite EnergyAustralia’s 1.7 million electricity and gas customers across eastern Australia helping it record $24 billion worth of revenue for the three years to June 2016, and an operating profit of about $200m last year …

What about the big international banks that generate multi-million-dollar advisory fees and turnover billions in lending and trading in Australia? …

… some of the world’s most prominent investment banks are collecting tidy sums of revenue in Australia and not paying corporate tax.

So it makes the claim that they will invest more if they get tax relief look very thin, when the actual tax burden they bear is at times zero.

And more evidence

Two pieces of research have emerged in recent days that bear on this issue.

First, “a secret survey conducted by the Business Council of Australia” itself has been leaked and reveals that (Source):

Fewer than one in five of Australia’s leading chief executives say they will use the Turnbull government’s proposed company tax cut to directly increase wages or employ more staff …

The lame response from the BCA is that the survey was unrepresentative and that “What’s on the public record is what matters and those commitments are on it.”

What is on the public record is the Letter these goons sent the Senate members trying to coerce them into extending the corporate welfare net.

On February 21, 2018, regular business commentator Michael Pascoe, who is hardly anti-corporate in outlook, said of the BCA special pleading (Source):

The business lobby is at a low ebb when it can’t offer up policies capable of giving Australia the same growth dividend as a corporate tax rate from 30 to 25 per cent, and when the Republican Party is its hero … spare me specious claims of it being all about jobs and wage rises.

The ‘race-to-the-bottom’ corporate tax drive that the neoliberals are pushing at present has overtones of the competitive devaluations in the 1960s as the Bretton Woods fixed exchange rate system was falling apart.

If one nation devalued then it might gain a competitive trade edge, depending on the responses of exports and imports to the relative price change.

But if everybody follows suit – end of story.

This point was made by the Reserve Bank Governor in his most recent appearance before the House of Representatives Economics Committee on February 16, 2018.

The Hansard records the following interchange:

Committee Member: I would invite you to make a comment-obviously it’s a competitive business-on what corporate tax cuts, not just in the US but indeed in a lot of major economies, such as the UK as well, have been doing for global growth rates-how you see that.

RBA Governor: I don’t know whether it’s a thing that’s really lifting global growth, because, if everyone’s cutting their tax rates to get a competitive advantage, it doesn’t improve global growth. It’s a bit like exchange rate depreciation.

He noted that any growth that did come from the tax cuts would be “because you get a fiscal stimulus: the government’s taking less money out of the economy, and that can give you a short-term hit.”

The analysis by the ABC journalist Ian Verrender (October 16, 2017) – Who really wins in the murky world of corporate tax cuts? – is apposite.

He writes:

If you believe the hype, without the proposed cut, Australia will become an economic backwater, capital will flood to rival economies with lower tax rates and any multinational looking to invest will simply look elsewhere …

Will a lower statutory tax rate boost the economy?

The theory says yes and goes something like this: Less tax equals greater profits. And bigger profits means more money to invest, which should boost employment and help lift wages.

The trouble with theories is that they tend to not work as envisaged in the real world. And what we’ve seen in the past decade – with global interest rates cut to zero – doesn’t quite fit the model.

The idea behind those rate cuts, to zero and even into negative territory, was that corporations would borrow and invest, boost wages, fuel inflation and pick the global economy up off the mat.

Instead, most of the benefits of the tax cuts were passed directly onto shareholders who demanded bigger dividends in a world where there was no return on cash.

Even the Treasury concedes that our Gross National Income will rise by just 0.6 per cent in the long term.

In other words, not a major boost to well-being of the rest of us as the foreign owners of companies reap a shareholding harvest.

In a forthcoming article in the Economic Analysis and Policy journal (Vol 59, September 2018) – Do firms that pay less company tax create more jobs? – Australian economist Andrew Leigh, who is also a Labor Party federal MP, explored the claim that “lower company taxes will lead to higher rates of job creation”

This article is already available on-line via ScienceDirect, if you have library access. You can find it HERE.

His conclusions were:

1. “no evidence that firms which pay lower rates of company tax create more jobs.”

2. “In aggregate, the one-third of Australian companies whose effective corporate tax rate is below 25% shed jobs, while the two-thirds of firms with an effective corporate tax rate of 25% or above were net job creators.”

3. “These results are robust to the inclusion of controls for firm size and industry fixed effects, as well as to expanding the sample to include unprofitable firms.”

Put away the glasses!

Hollow threats

Of all the analysis presented in recent months on this question, the most entertaining input, in my view, came from one Scott Phillips, who manages an investment advisory firm in Australia.

In his Op Ed (March 22, 2018) – Companies flee Australia if they don’t get a tax cut? Don’t buy it – he reaffirms his pro-corporate values.

So not a ‘progressive leftie’ at all.

But coming from that ideological persuasion he wrote:

So it chafes, slightly, to be sitting on the other side of a debate involving the ‘peak lobby group’ for large businesses, the Business Council of Australia (BCA) …

Now, you and I can agree or disagree on the appropriate level of corporate tax. Frankly, I see little reason for it to be lowered – the list of significant companies that have fled Australia for the US since Donald Trump became president can likely be counted on the fingers of one finger. At night …

The scare campaign of ‘companies will flee’ is almost certainly that: a scare campaign …

And who’s going to up sticks? The miners, whose ore isn’t going to follow? The supermarkets or telcos whose customers won’t take kindly to being told to shop in Kentucky, California or Ohio? The banks, with their cosy margins and oligopoly? The lawyers and accountants whose advice is needed by local firms looking for offshore tax havens? …

We often hear of ‘capital flight’. But once the bricks and mortar are in place, the capital is not going anywhere.

And if the ‘capital’ is in the ground, it is not going anywhere and can be exploited by someone else.

Further, many companies, as Phillips notes, have to sell goods and services locally. They are not going anywhere.

Scott Phillips challenges the BCA argument about the likelihood of an investment boom should corporate tax rates fall.

He writes:

Apparently, Woolies can’t get a decent return on its investment without a tax cut. Ditto Woodside and Fortescue. Man, there must be some marginal investments out there. Can you imagine doing something at a 25 per cent corporate tax rate that you wouldn’t do at 30 per cent? Because, remember, you don’t pay 30 per cent tax on your revenue. Or even your gross margin. You pay it on before-tax profits. So if that investment isn’t profitable, you don’t pay any tax, regardless of the rate.

He finishes by quoting from Warren Buffett’s New York Times Op Ed (November 25, 2012) – A Minimum Tax for the Wealthy.

In that article, Warren Buffett relates that in the 1950s when the top tax rates were high and he was managing funds for investors “Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.”

He notes that:

Under those burdensome rates, moreover, both employment and the gross domestic product (a measure of the nation’s economic output) increased at a rapid clip. The middle class and the rich alike gained ground.

So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if – gasp – capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

And his final advice:

… maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.

And finally, while on the ‘snouts in the trough’ theme, there was a report yesterday (March 26, 2018) – Tax concessions to wealthy costing six times the dole – which discussed the results of Australian research into who benefits from welfare payments and tax concessions.

We learned that a study of various data sources (Treasury, ABS, HILDA longitudinal) that:

… major tax concessions totalling $135 billion per year were costing the budget more than the four main welfare payments – the aged pension, family assistance payments, disability benefits and Newstart – combined …

In fact, these tax concessions are costing the budget about six times as much as Newstart …. [the unemployment benefit] …

… more than half of the benefit from tax concessions goes to the wealthiest fifth of households …

The cost to Australian taxpayers of the richest 20 per cent of Australians is actually a staggering $68 billion per annum …

The report also highlights how skewed the savings are from tax concessions – the top 20 per cent get $68.5 billion and the bottom 20 per cent get about $6 billion.

That is what ‘welfare’ for the rich is all about.

Conclusion

The overwhelming argument used by opponents to the Federal government’s tax cut proposal is that it will “put the budget at structural risk to prosecute an ideological outcome”.

It is pointed out that the Treasurer has been one of the most aggressive proponents of ‘getting the budget back into surplus’ but then turns around and proposes a substantial increase in the deficit by proposing these tax cuts.

For me, clearly, these arguments are erroneous.

Yes, the Treasurer is a hypocrite. But we have known that all along. He professes deep Christian values yet is part of a machine that locks refugees up in hostile prisons on Pacific Islands, without the slightest blink.

The real questions that should be discussed in relation to the proposed tax cuts are:

1. Is a fiscal stimulus required right now?

Answer: Definitely, with more than 15 per cent of available labour resources either unemployed or underemployment or hidden outside the official workforce.

Okay:

2. Is a stimulus coming from giving the top-end-of-town more of the national income the most appropriate way to achieve 1.?

Answer: Definitely not.

There is a crying need for major investment in public infrastructure – school, health, transport, water, etc – at present in Australia.

There is a crying need for public sector job creation programs, preferably a Job Guarantee.

None of these needs will be satisfied by a corporate tax cut. If anything, the Government should seriously retract the billions of dollars in concessions and other corporate welfare it hand outs to business on a continuous basis.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.