Will company tax cuts benefit us?

On Q&A last Monday night assistant treasurer Kelly O’Dwyer tried to explain to a man on a very low income why it was better for the government to spend $50 billion providing tax cuts to companies than it was to provide tax cuts to low income earners. The argument essentially boiled down to this: lower tax rates will leave companies with more money to invest employing people. Or as a Treasury paper put it

For a small open economy, such as Australia, per capita income is determined by the level of its terms of trade, labour productivity, labour force participation and population. Australia’s terms of trade, labour force participation and population growth are expected to be flat or declining in the foreseeable future which implies any improvement in Australia’s living standards must be driven by a high level of labour productivity.

This paper shows a company income tax can do that…by lowering the before tax cost of capital. This encourages investment, which in turn increases the capital stock and labour productivity

At least that’s what economic models show. What about real-world experience? The Australia Institute has released a paper that suggests in a real world things don’t operate anything like the economic models suggest they should. Check out the charts below. They show that in Australia’s experience cutting company taxes has not produced the bonanzas that are promised. Figure 1 shows that there is very little correlation between company tax rate and the rate of economic growth.  Countries with the highest economic growth range from those with very low company tax through to very high company tax. Figure 4 shows how company tax rate and real GDP growth have tracked in Australia over time.  bizarrely, if anything, lower company tax rates been associated with lower growth in GDP.  Figure 3 shows that declining corporate tax rates have not led to an increase in real capital investment.

I’m not an economist  and there may well be explanations for these trends that is compatible with the notion that decreasing company tax rates is beneficial, but the Australian Institute is not alone in its argument. An article by economist Jim Stanford in March new Matilda suggests a similar result in Canada. Between 2007 and 2015 company tax in Canada was cut from 21% to 15%, an enormous cut by any measure. In the same period business investment flatlined as a proportion of GDP.

So if that $50 billion over the next 10 years is not actually producing any benefit to the wider economy, where is the money going, Hmmm…straight out of the pockets of the Australian public and into the bank accounts of shareholders. I reckon there are better ways we could use 50 billion bucks.