Business’s ‘Kumbaya’ promises show how weak the need for company tax cuts is | Greg Jericho

There is little sadder than watching business groups and companies attempt to lobby in public by promising that they’ll be good. This week the Business Council of Australia delivered a statement to the crossbench senators, signed by 10 CEOs of some of Australia’s largest corporations, effectively begging them to pass the company tax cut legislation.

But the statement only served to reinforce just how weak the impact of the company tax cuts will be on the lives of most workers.

The statement pledged that “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”.

Presumably this means if the legislation is not passed they will not commit to investing more in Australia?

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It should be noted that while companies are crying out for a tax cut in order to employ more Australians, this week saw the government boasting of record level of employment growth. Similarly non-mining investment in the past year grew by 10% – the best result in four years and double the 30-year average annual growth of 5%.

That this can be achieved under such a high company tax rate must surely rank as an economic miracle.

Of course, none of the CEOs of the 10 companies (five of which paid no tax in 2015-16) outlined any actual investments they are holding off on making unless the company tax cut goes through.

Indeed because the tax cut for companies with a turnover of more than $1bn a year is only set to occur in 2022-23, and will only fully be cut to 25% in 2026-27, any suggestion of investment decisions not occurring would be based not on the current company tax rate, but on what they anticipate it will be.

That length of time also hurts the companies’ and government’s argument about “stronger wage growth”.

There is absolutely no basis for arguing a tax cut will bring about stronger wage growth immediately. The government might hope you will believe that, but none of their reasoning for the cut suggests it will happen.

A company tax cut theoretically leads to stronger wage growth because firstly such a cut is supposed to increase (mostly foreign) investment in equipment, machinery and infrastructure that in turn leads to an increase in productivity.

Once that productivity increase occurs, then and only then wages growth will increase because the companies are producing more with the same amount of labour. They will thus seek to employ more and will not only raise wages to reward productivity improvements but also to entice workers to either stay or come work for them.

But of course that end result is not only predicated on productivity improvements actually leading to increased employment (which is in no way a certain thing) but also that workers will be in a position to bargain for higher wages.

And remember as well, even according to the government’s own research the improved wages growth only is to occur “in the long term”. And just how large that theoretical wages rise would be is also up for debate.

Treasury estimated a company tax cut would lead to a long-term ongoing real wage increase of 0.4%, but new research by ANU economist Chris Murphy, which takes into account the recent changes in the US company tax rate, suggests it would be just 0.29% if financed by bracket creep.

Another new study by University of NSW Business School’sprofessor of finance, Peter Swan, whose work in the 1980s for the Campbell Committee of Inquiry into the Financial System led to the Hawke government introducing the dividend imputation system, suggests the company tax cut won’t even lead to increased foreign investment.

He argues that “investment in Australia is already at its globally efficient untaxed level” as foreign investors are already able to take advantage of tax laws that allow them to sell shares before dividend payments are made and then buy them back afterwards. He argues this negates the impact of the tax cut and that “even if the Australian corporate tax rate is reduced from 30% to 25%, there should be no new foreign investment, but more Australians should invest offshore due to the lower tax impost”.

He concludes that “consequently, the tax cut plan is redundant with no billions of dollars’ worth of desirable foreign investments left lying on the table”.

Senator Derryn Hinch was right to call the BCA’s statement as “very kumbaya”. There will be no way to prove any company has either increased investment or wages due to the tax cut, but there will be – as was the case in the US – lots of claims that this has occurred.

But to believe companies will pay higher wages because of this tax cut requires a great deal of naivety.

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Which bring us to Senator Pauline Hanson who agreed to support the tax cut, despite having previously spoken out against it because, as she told the ABC, she was able to get funding for a “pilot program” for 1,000 apprentices in private business.

The ALP quickly noted the government has cut apprenticeships by 140,000 places since 2013.

The ALP is however being rather misleading about apprentice levels.

A recent study by the Mitchell Institute found most of the drop in apprentices has actually been due to a drop in one-year “traineeships” due to measures brought in by the Julia Gillard government to stop rorting by employers and training providers.

But even if we only focus on the more traditional “trade” industries, in 2017 there were 168,000 apprentices – down 41,000 from the 209,000 in 2013. That makes Senator Hanson’s 1,000 apprentices program rather small beer, and must have had the government senators laughing at how cheaply she folded. One wonders if they even bothered to hide their laughter till they left the room.