Who really benefits from corporate tax cuts?
After Donald Trump’s recent slash to the US corporate tax rate, this seems to be the question on everyone’s mind.
Those in favour argue that corporate tax cuts would set the economy alight. Markets would soar, investing would become more appealing, and the increased profit would trickle down into higher wages for workers.
In other words, it would trigger a monumental spending spree that would flow through the economy and reward workers at all levels.
There is also a long-running argument that keeping corporate taxes high stifles innovation and discourages investment. Leaving the economy stale, uninviting and, most importantly, uncompetitive.
As the worldwide corporate tax cut trend continues, the pressure to remain competitive has ramped up. Drowning out criticism that a cut would only put more money into the pockets of wealthy business owners and have little impact on working Australians.
However, our tax rate is currently sitting at 30%. That’s no small figure. It places us 10th in the list of leading global economies — outranking Canada, the UK and New Zealand.
If no action is taken, our ranking will only increase. By 2020, both France and Belgium will have lowered their tax rate to 25%, leaving us with the 2nd highest rate in the world.
Considering this, the Turnbull government is pushing for tax cuts totalling $65 billion — lowering our rate gradually to 25% by 2026. The coalition argues that this would allow us to stay on par with other major nations.
More controversially, however, the cuts are being peddled as a necessary step to stimulate wage growth.
Can tax cuts solve low wage growth?
Wage increases are a hot-button issue in the news right now. Looking at the charts, wages have been in a clear downtrend for the past few years. This result has frustrated many, considering that unemployment is down and living costs are skyrocketing.
Treasury secretary John Fraser told the Senate on Wednesday that tax cuts would ‘absolutely’ boost investment and productivity, which would in turn boost wages.
Finance Minister Mathias Cormann was even more confident, stating:
‘Wages will increase as certain as night follows day…anyone who argues against that, argues against the existence of mountains in Switzerland.’
Major Australian businesses like Qantas are also jumping on the tax cut bandwagon — using the issue of jobs and wage growth to push for the cuts.
Qantas CEO Alan Joyce was quick to assert:
‘Cutting company tax isn’t about doing big business a favour. It’s about encouraging investment that ultimately leads to more jobs. That’s why we’re seeing other countries cut theirs.’
While that may be true, Qantas hasn’t paid corporate tax for close to 10 years. Due to Australia’s overly complex taxation system, finding loopholes is simple. And as a result, 380 (one in five) of Australia’s largest companies haven’t paid corporate tax for the past three years or more.
To name a few, Energy Australia hasn’t paid corporate tax for the last decade. And News Corp has evaded it for four years.
So who would the cuts really benefit?
There’s no guarantee that companies would use their increased capital to hire more workers or build new businesses.
They could choose to invest that money overseas. Or buy back their own shares, as almost 100 major US corporations have already planned to do.
These buy-backs only serve to put more money into the hands of shareholders and business owners. Although that’s not always a negative, for some perspective, Warren Buffett gained $29 billion in December on the back of the tax cuts and is mainly using it to buy back his own shares.
That said, there is evidence of companies paying employees more after the cuts. Walmart was frequently cited as an example after they raised the minimum wage from $10 to $11 per hour after the cuts.
But as Shae Russell wrote last month, Walmart had been raising the hourly rate for employees for years out of necessity. Wages needed to be raised in order to retain a dedicated and skilled team.
As the minimum wage in Australia is already high, losing staff to higher-paying businesses is usually not an issue. Consequently, deliberately increasing labour costs is unlikely to be on most companies’ agenda.
So despite all of the confident proclamations, no one can truly guarantee what the outcome of the proposed tax cuts will be. There is clearly no simple solution to the problem of wage growth. And chances are it’s not going to improve drastically anytime soon. Especially when you add automation to the mix.
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