The $65 billion company tax cut no-one is asking for

Malcolm Turnbull Scott Morrison

It has been difficult to focus on other matters in federal politics – and that’s understandable, given we’ve got the Deputy Prime Minister and leader of the National Party, Barnaby Joyce, hanging on by what must be a very precariously balanced thread.

My sources are saying the only reason why he’s still there is that in a party room of 21, there are seven that want to see him go, and 14 (which, presumably includes Joyce) want him to stay. And the 14 wanting Joyce to remain are staunch in their support and are not for moving. And not even the presence of National President, Larry Anthony, who I must say, is as threatening as a wilted basil plant on a rare hot day in the Northern Tablelands, can sway any of them. So, Barnaby remains in his place.

 

But beneath the hot surface of the National Party leadership turmoil is the question of company tax cuts to business, which the Prime Minister, Malcolm Turnbull, and Treasurer Scott Morrison have been pushing incessantly since the 2016 Budget announcement, where they promised a $50 billion company tax cut over ten years. This was a signature announcement at the 2016 Budget, but the 2016 election was called just three days later, and company tax cut has become a clarion call to the large business sector ever since.

This $50 billion company tax cut has now increased to $65 billion over ten years, and has become such a divisive political debate that it’s difficult to assess whether there will be any benefits at all over a ten-year period and, if there are benefits, who will they accrue to?

The arguments put forward by both the Prime Minister and the Treasurer have been simplistic, to say the least, and rely heavily on a basic political argument, that goes like this: companies will pay less tax and, therefore, have more access to cash. With this additional cash, companies will require more labour, and will employ more staff. And as more people are employed, the government will increase revenue through income tax receipts. If only economics and taxation was so simple.

In the case of small business – which for the purposes of the government’s first round of tax cuts, will apply to companies with an annual turnover of less than $2 million – this difference might be in the order of $5,000, nowhere near enough to employ an additional staff member. What will this small business do with this additional $5,000? They might purchase a new laser printer. Or a new piece of machinery. Or new office furniture. Or they’d be likely to pocket this small windfall, as it’s only an extra $100 per week throughout the year. But will they employ a new staff member? That’s highly unlikely.

At the other end of the scale, let’s look at the supply chain and logistics company, Fox Holdings. In 2016, it only paid $34 million in company tax on its turnover of $2 billion, although the tax paid was based on taxable income of $112 million. All things being equal, at the time Turnbull’s 25 per cent tax cut is implemented, this would result in a $6 million savings.

What would a company like Fox Holdings do with an extra $6 million per year? Unlike the small business example, they would certainly have a great deal more flexibility, but would they hire additional staff? And what type of staff would they employ, if any?

Staffing costs are the largest expense for many businesses, usually around the 50 per cent level of all expenses. A supply chain and logistics company such as Fox Holdings would more than likely invest in labour-cost savings machinery and efficiencies, rather than hiring more staff. Certainly, they might employ some new staff, but most of this additional tax savings would be re-invested in automation and innovative mechanisation which would reduce staffing levels.

Likewise for Gina Rinehart’s company, Hancock Mining. The current model for new mines built in Western Australia is based on the 10,000/1,000/100 model – which essentially means 10,000 workers are required to construct a mining site, 1,000 workers are required in the consolidation phase and then, eventually, 100 workers are required to permanently manage the mine. Hancock Mining, like many other larger mining companies, frequently develop innovative techniques for automation and management processes that require less people to manage them.

The company would save around $45 million per year (all things being equal) if Turnbull’s company tax rates come into effect. Would a company such as Hancock Mining use this additional saving into employing new staff, or investing more money into automation and labour saving techniques, so the next time a new mine comes online, they’re only employing 5,000 staff in the construction phase? That would save a lot of money, and keep shareholders very happy.

A company tax cut down to 25 per cent, in the current economic circumstances, would probably have no effect on employment outcomes, and would hit government revenues hard at a time it needs to increase, not decrease revenues. It’s difficult to see what the purpose is behind this largesse, aside from the maniacal and fervent belief in supply-side economics, which is now widely considered a discredited economic model for increasing wages and is mainly beneficial to the wealthy; or more cynically, a reward to those rich benefactors of the Liberal Party, and supporters of its parliamentary right wing.

But for those with long memories that like to point out the Hawke–Keating governments reduced company tax from 49 per cent down to 33 per cent between 1988 and 1993, using exactly the same arguments that Turnbull and Morrison are using today: yes, that is correct. It is exactly what they argued, using the same sentiments – to boost business competitiveness, increase employment, improve efficiencies. But there were trade offs within the rest of the taxation system, with changes to capital gains and fringe benefits taxes, among others, whereas Turnbull is offering nothing to offset the $65 billion loss of government revenues over the next ten years.

The other claim of Malcolm Turnbull has been that company profits will flow into higher wages but, again, there is nothing that supports this claim, and recent experience has shown that there has been no correlation at all between company profits and a rise in wages. According to the Bureau of Statistics, the wage growth during 2017 was 1.9 per cent, while company profits rose by 20.1 per cent.

The government’s proposal to reduce company tax from 30 per cent to 25 per cent is one being proposed at the wrong time, and at the wrong place, without any offset to the Budget to retrieve the average loss of $6.5 billion per year over the next ten years, other than the forlorn hope that companies will employ more people, rather than keep the money to themselves. That really is a big ask.

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Eddy Jokovich

Eddy Jokovich is a Sydney-based journalist and producer of many books, magazines and handbooks and has worked as a war correspondent, journalist, lecturer in media studies and production.

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