Trickle-down trouble: Coalition risks backlash in enlisting Qantas to spruik tax cuts

Having just managed to rid itself of one Joyce, the government has been keen to embrace another member of the clan. At Sydney airport on Friday, Mathias Cormann, the acting prime minister, and treasurer Scott Morrison enlisted Qantas chief executive Alan Joyce to promote their plan to cut corporate tax rates from 30% to 25%.

What better embodiment of Australian corporate success than the airline’s boss? After plumbing the depths four years ago with losses of $2.8bn, the national carrier is now soaring into the wide blue yonder of profitability this week with half-yearly earnings of $976m.

But it’s a bold move by the ministers to align themselves so closely with the big end of town. One reason is that the justification for tax cuts – the trickle-down theory that they are good for everyone because more profitable companies invest more and create more jobs – is heavily contested and might not give the economy the boost the Coalition is hoping for. Many economists think Australia’s faltering housing market and a possible drop in Chinese demand for raw materials will have a bigger part to play in the next couple of years.

And while Qantas can be seen now as a corporate champion, its (perfectly legal) ability to avoid paying corporate tax in recent years on its huge profits may yet make it a pariah. It’s hard to explain why a business that is throwing off cash like Qantas hasn’t made much a contribution to the nation’s coffers. Analysts can explain all about how the company has been allowed to use the losses as credits against tax, but that cold accounting might wear thin with the public when one of the biggest issues at the next federal election will be why it is that the corporate share of Australia’s economic cake is growing at the expense of the workforce.

Forty years ago the percentage of gross domestic product that went on workers’ pay was 54%, according to figures from the Australian Bureau of Statistics, compared with 15% on what the bureau classes as the gross operating surplus of corporations. Fast forward 40 years and it’s a different story. The most recent quarterly figures from the Australian Bureau of Statistics show that in September 2017, workers’ share was 47.35% while the slice taken by companies was 24.4%.

That’s a stark change and tells the story of globalisation. High tariffs and strong unions kept wages high back in the 70s before the trade agreements and the rise of Asian economies able to take advantage of a more level playing field changed the game. The result has been bad for pay but good for the profits of companies that survived the opening up of the world economy.

Joyce and his ministerial supporters like to cite global competition as the reason why Australia must lower its headline company tax rate. The Qantas boss told reporters on Thursday that he was “worried that there will be an investment drain out of Australia and this will lead to further investment in the US” if the government doesn’t match Donald Trump’s plans to slash the tax burden for USA Inc.

Cormann also talked up the threat. “If we force businesses like Qantas … which are involved in global competition to be less competitive because taxes in Australia are higher than in other parts of the world, then that puts pressure on our whole economy,” he said on Friday.

It’s not just Qantas that is enjoying bumper returns, meaning that the Coalition’s economic policy begins to feel like a race to the bottom for wages and a race to the top for profitability. The current reporting season on the Australian stock market has seen a 14% rise in profitability. “That’s pretty strong,” says Michael McCarthy, chief markets strategist at CMC Markets in Sydney. “Apart from the bounce after the GFC that’s one of the better numbers.”

The good news, as McCarthy points out, is that these healthy balance sheets will mean more of them pay more tax.

But if those taxes are reduced and the benefits flow to overseas investors in the shape of higher dividends rather than pay rises for the workers, the Coalition ministers might find themselves with another Joyce that they’d rather not have around.