To cut (company) tax or not - that is the question

Fri, 31 Mar 2017  |  

This article first appeared on the Yahoo 7 Finance web site at this link: https://au.finance.yahoo.com/news/to-cut-company-tax-or-not-that-is-the-question-002352751.html 

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To cut (company) tax or not - that is the question

In the furious debate about the cost and benefits of the government’s proposed cuts to company tax, the discussion is more about ideology and not much about facts.

In an ideal world, that is one where the budget can afford it and other social and economic issues have been addressed, cuts to tax rates on personal income and companies are probably beneficial to the economy. That said, data from around the world shows that there is effectively zero correlation between the level of a country’s company tax rate and the level of unemployment.

That’s right. There is no evidence to suggest that a low company tax rate is associated with a low unemployment rate and vice versa. Some countries with low company tax rates have high unemployment, while some with a high company tax rate have low unemployment.

And yes, it is possible to cherry pick those countries with low company tax rates and low unemployment, but given the frequency of exceptions to this rule, there is little to be gained from cutting company tax rates, at least in terms of addressing Australia’s weak labour market and high unemployment.

Let’s have a look at a few examples. In the US, the company tax rate is a high 35 per cent. The US unemployment rate is low at 4.7 per cent. There is nothing to worry about here, it would seem, in terms of company tax boosting unemployment.

In Bulgaria, where the company tax rate is low at just 10 per cent, the unemployment rate is high at 8.2 per cent. In Cyprus, where there is also a low company tax rate of just 12.5 per cent, the unemployment is dreadfully high at 14.1 per cent. New Zealand has a company tax rate of 28 per cent, with an unemployment rate of 5.2 per cent making it somewhere in the middle of both.
See the pattern? That is, there is no obvious link between company tax rates and unemployment.

Which goes to the Turnbull government’s centerpiece of its economic policy agenda – a 10 year plan to cut the company tax rate to 25 per cent from the current 30 per cent. Interestingly Treasury modeling suggests it will make no difference to the unemployment rate when fully implemented.

We know that the total cost to the budget of the proposed company tax cuts is just under $50 billion. At a time when government debt is rising by about $6 billion a month, where the annual budget deficit is stuck around $20 to $30 billion and where spending on health, education, aged pensions and in other areas is lagging, company tax cuts would seem a very low priority. Making all the problematic is that there is no certainty that these tax cuts will lower the unemployment rate.

A cut in company tax rates is largely a transfer a cash from the government (that is other tax payers) to companies. With that extra cash, it is not clear that they will boost investment and employment. They may retain the tax revenue in earnings and lower their debt, they may give it to shareholders in higher dividends, they may use it to raise investment. It will depend on each company.

But recall these possibilities are at a cost of a weaker budget position which means the greater risk of a credit rating downgrade which might actually add to their borrowing costs!
It’s time to shelve the company tax cut and in the budget in May, the government should look to other policies that will yield a greater return for the economy.

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This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

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