With yet another effort to cut company tax rates for large companies on the Coalition’s agenda and being pushed by big business and its media cheerleaders, what is clear now — much more so than during previous efforts — is the extent to which it will represent another attempt to transfer wealth from younger people and lower-income Australians to wealthy seniors.
In the time since the Coalition abandoned its last attempt to gift some $80 billion dollars over a decade to large companies via a reduction in the company tax rate, we’ve been able to observe the real-world effects of Donald Trump’s massive company tax cut in the United States from 2018.
The hard evidence from the US is that Trump’s company tax cut produced no investment boom, that jobs growth slowed from the last years of Obama’s presidency, that the tax cuts had “a relatively small (if any) first-year effect on the economy”, and that wages growth and bonuses slowed noticeably after the tax cuts.
Curiously, the fall in wages growth in the US after the company tax cuts echoes what happened in the UK and Canada when those countries cut company tax rates — but company tax cut advocates continue to insist they will lead to higher wages growth.
The lack of any impact from the Trump tax cuts is understandable when you realise that they were directed not to additional investment by companies but to shareholders via share buybacks and increased dividends.
Share buybacks totaled an astonishing US$806 billion in 2018, more than 25% higher than the previous record in 2007, and US$730 billion in 2019. Dividend growth also accelerated in 2018 and 2019.
That meant the primary benefit of the tax cuts flowed to wealthy investors — the wealthiest 10% of Americans own more than 80% of US shares — and company executives with remuneration linked to company share prices. That’s why the wealth of America’s billionaires has dramatically accelerated since Trump became president.
There is no reason to believe corporate tax handouts would have any different result in Australia. Indeed, Australian companies have already been engaging in widespread share buybacks over the last two years. Rio Tinto, ANZ, Qantas, AGL, CSR, Woolworths, Aurizon, Amcor are just some of the companies that have conducted tens of billions of dollars in share buybacks over the last 18 months — despite a stagnant economy and claims from big business that company tax cuts were needed to stimulate investment.
If anything, the pressure to increase share buybacks and pay higher dividends (which would mainly benefit foreign shareholders due to dividend imputation) would only increase if there were company tax cuts.
An interesting, and little-remarked, push during the pandemic has come from wealthy baby boomer retirees — who already receive taxpayer handouts via the franking credits rort — demanding that banks continue to pay dividends to them despite the shutdown of much of the economy and calls from government for banks to play a social role in supporting businesses through lockdown. Extra cash in the form of tax handouts to big business will only prompt more demands for companies to return it to investors.
What will be different in Australia is that we’re not able to run a perpetual gigantic deficit. Trump’s tax cuts pushed the US annual deficit over a trillion dollars while unemployment was already at record lows, leaving it to soar to unprecedented levels as a result of the pandemic. But given the status of the US economy and its currency, no one except fiscal hawks in the US are worried about that, especially when interest rates are at historic lows.
Australia has no such luxury: starting from October, Josh Frydenberg, and his successors, will have to chart a path back to surplus of sufficient size that our net debt to GDP ratio will start coming down again over time.
All taxpayers will have to contribute to that task. But a company tax cut would mean that a greater proportion of the burden will fall on workers, and especially younger workers who will be paying off our current debt for much of their working lives — with investors and wealthy retirees getting the benefit via share buybacks and higher dividends.
In other words, it will be yet another transfer of wealth from younger Australians to older generations, just as is happening via the housing market and its tax distortions, via climate inaction, via health insurance and the HECS-HELP system.
Quite some reward for the sacrifices young people are currently making to protect older Australians.
I hope Bernard realises that a substantial number of retirees are too old to be “baby boomers”, but the generational wars label is obviously too difficult to resist.
Perhaps he was referring to those who bleat the most about not having their tax rorts.
There should be a progressive wealth tax.
If there was an average annual tax of 1% on net wealth, it would generate around $120 billion a year, which could be used to withdraw liquidity from circulation, preventing inflation and reducing the deficit, and also reduce other taxes, such as the GST, which is regressive.
The elderly and rich would pay more than the young and poor.
There should also be a broad based carbon tax with the proceeds being used to give everyone a yearly dividend (discouraging profligate use of fossil fuel energy) and financing emissions free energy.
Fair idea, but inflation isn’t actually caused by excess liquidity. Every idea about what causes inflation, theoretically, has been smashed by reality over the last 50 years. Unfortunate when reality does that to long held theories.
I agree with most of Bernard’s comments however where he says “higher dividends which would mainly benefit foreign shareholders because of dividend imputation” seems wrong to me. My understanding is that foreign shareholders do not benefit from dividend imputation because they do not pay taxes in Australia? Am I wrong ?
Nup.
I believe the point is that shareholders that receive franked dividends would receive no benefit from a tax rate cut, whereas foreign investors will.
Correct.
There was an article on ABC this morning on how the youth will pay for this crisis, but seeing the Twitter comments made me realise that any well-reason stating of the facts won’t stop angry boomers from commenting how good the youth actually have it – and that really nothing is being asked of them. Contra the evidence in that article and the many published elsewhere, of course…
Austerity seems the only politically-expedient course of action, because those measures will target the people who “deserve” to be targeted.
That’s it in a nutshell. All liberal governments since the mid 1990s have worked to the principle that all of those, and only those, at or near the bottom of the economic ladder “deserve” to be targeted. That was the underlying objective for their tax cuts / middle class welfare and, ultimately for introduction of the serf-like conditions envisioned in the infamous “Work Choices” legislation.
Nothing will change under this administration except for the introduction of “Work Choices 2” and the imposition of repressive religious “rights” to be inflicted on the “common herd”.
I am still am trying to discover the mechanism where cuts to company taxes will deliver higher wage increases.
This is a good point; in fact company tax cuts and wage increases are completely contradictory ideas in the corporate business mind. Wage increases are always to be avoided if possible. The supposed wage increases are just the illusory mechanism whereby the voters are persuaded to embrace the tax cuts.
You will never see that mechanism because it is no part of the government’s intention. The benefits will almost all go to offshore shareholders and a small part of that benefit will return in the form of grateful donations to the party in power.
This government needs to re-title itself “The Neo Plutocratic Party” and leave the current name for a group of honest, truly liberal individuals to adopt.
Not much neo about the NuRite – it’s always the same old wrongs.