Scott Morrison's choice: 'If Donald Trump jumped off a cliff, would you?'

By | octubre 1, 2017
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Peer pressure is a powerful force, but not one that always leads to wise decision making.

Australia’s corporate tax rate is again in the spotlight thanks to US President Donald Trump’s ambitious tax plan announced last week to slice the US rate from 35 to 20 per cent.


Trump proposes $5 trillion tax plan

President Trump and Republicans are proposing a $5 trillion plan that would cut taxes for corporations and individuals, though questions into the cost remain.

Let’s leave aside the issue of whether Trump will be able to deliver on this promise.

The question is, with so many other nations engaged in a race to the bottom on corporate tax rates, can Australia afford to leave its 30 per cent rate where it is?

The first point to remember is that Australia’s company tax system is unique in the world in that domestic shareholders are actually rebated for every cent in company tax paid, so-called “franking credits”. So while our 30 per cent headline rate looks high, it is less of a burden than global comparisons of headline rates imply.

To the extent that foreign business people decide to move to Australia, naturalise and set up businesses here and issue shares to domestic investors, they too will benefit from the franking credits on offer here.

But it’s true that foreign owners of businesses who operate in Australia get no such credits, and so – based on a simple tax arbitrage analysis – face an increasing disincentive to invest in Australia relative to elsewhere.

Australia’s Treasurer Scott Morrison who is still trying to push through Parliament a reduction in the corporate rate from 30 per cent to 25 per cent for large companies, thinks the implications of Trump’s move are obvious, “laying down the challenge to the rest of the world to keep up, or risk your economy losing its competitiveness”.

Morrison observes that even the Chinese are making noises about slashing company taxes, following a similar move by the previous socialist government in France.

Given that Labor continues to oppose Morrison’s tax cut for large corporates, the Treasurer was able to accuse Bill Shorten last week of being to the left of both communists and socialists. “This is Chairman Bill’s Great Leap Backwards,” he riffed.

To which we might caution Morrison: be careful of the company you aspire to keep.

Is Morrison really saying that a foreign investor, faced with a choice to invest in China or Australia, would make the decision solely on which had the lowest company tax rate? That they would ignore, to put it mildly, the somewhat unpredictable, undemocratic and immature financial structure supporting one of those two potential investment destinations?

To insist Australia must drop its corporate tax rate to match international rates is like insisting consumers shop only on price; that product quality, reliability and standard of service, ease of payment systems and availability of refunds are not also important considerations.

All taxes are a discouragement to economic activity that would otherwise occur, and it’s true that, in a world of more mobile capital, a higher company tax rate may prompt some businesses to choose to invest elsewhere.

But other considerations influence investment decisions, particularly ones made with a long time frame in mind.

It may be that companies ultimately prefer to invest in countries with sufficient government revenues to provide an environment most conducive to business growth, including a highly educated workforce and functional infrastructure.

They may prefer to put their money in a nation governed by politicians who can manage their budgets without leaving crippling legacies of debt to future generations, which will lead to higher taxes in the future anyway.

They may prefer to invest in countries with leaderships that don’t believe in magic pudding economics, that is, that lowering tax rates actually boosts revenues by unleashing economic growth. It didn’t work for Ronald Regan. It’s unlikely to work for Trump.

In a recent essay for the Lowy Institute, former Reserve Bank deputy governor Stephen Grenville weighed in on the corporate tax issue, arguing cutting Australia’s headline rate would have only a “minuscule” impact on foreign investment here.

Grenville points out that many foreign companies have demonstrated themselves more than willing to invest in Australia, attracted by our relatively concentrated markets with few suppliers and large “super profits” on offer. Think of the foreign retail invasion of Aldi, Costco and Zara, to name just a few.

And if global investors did suddenly prefer to invest in the US over Australia, this would push up the value of the US currency and reduce the value of ours – acting as a countervailing force and making it even cheaper to invest here, Grenville observes.

And given that foreign companies have proved so successful at avoiding paying tax here, anyway, Grenville sees little reason to give them a further discount.

“Foreign companies have the benefit of Australia’s governmental and administrative infrastructure, protecting their physical security and providing legal backing for their contracts and intellectual property. They should make a contribution to the upkeep of this system.”

Grenville even suspects a darker motive to politicians’ desire to cut the company tax rate.

The real problem with Australia’s company tax rate is that it is already substantially lower than our top personal income tax rates, creating an opportunity for tax minimisation for high-tax-bracket individuals who can create a company or trust structure to delay paying tax on their income, and thus benefiting from the time value of money.

“Perhaps some of those lobbying for lower company tax rates are the beneficiaries of such schemes,” Grenville muses.

In a world of increasingly footloose capital, the global race to the bottom on company tax presents a problem for all governments seeking to attract investment while also extracting adequate tax revenues to fund their services.

Grenville says a global effort is needed to ensure companies pay a fair sum for the benefits they receive and to ensure countries do not continue the sort of beggar thy neighbour policies Trump has proposed.

And here’s a piece of motherly advice for those feeling the irresistible pull of peer pressure on corporate tax: If Donald Trump jumped off a cliff, would you?

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