Look out Aussie politics, there’s a new battle brewing.
Corporate Australia is about to offer you a deal:
Reduce the corporate tax rate…and they’ll start paying employees more.
At least that’s what the likes of Woodside Petroleum Ltd [ASX:WPL] and Qantas Airways Ltd [ASX:QAN] are hoping for.
The pressure will be on the Aussie government to reduce the corporate tax rate, much as the Trump administration did in the US, with the corporate tax rate in the US falling from 35% to 21%.
Richard Goyder, chairman-elect of Woodside Petroleum, notes:
‘I think it’s quite instructive what Walmart did in the US after the Trump tax cuts were passed and they passed on an immediate wage increase. There’s likely going to be some inflation in the US, employment rates will be strong… I don’t think business are going to have any option but to use some of the benefits of any tax reduction into paying more for people. I just think if France is doing it, the US is doing it — our Senate needs to stand up.’
Qantas CEO Alan Joyce also claimed:
‘[There is a] real risk of Australia missing out on investment if our company tax rate is allowed to remain so uncompetitive.
‘It becomes a handbrake on the economy. 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.’
These statements come on the back of a legalisation proposal going before the Australian Senate this week.
The proposal is for all companies to have their corporate tax rate fall to 25% by 2026–27. Currently, the tax rate is either 30% or 27.5% for businesses that turn over less than $10 million per year.
Chances are Labor isn’t going to approve it. Already it has said that it plans on using its ‘numbers’ to block the tax cuts passing.
The reason? Labor says that any reduction in corporate tax rates will only benefit the big end of town.
For starters, Australia’s infamously complicated tax system ensures most large corporations employ gifted accountants to work out how to reduce tax obligations. High-level corporate accountants are well paid for a reason.
That aside, reducing the corporate tax rate by either 5% or 2.5% over the next eight years is probably not going to move the needle too far.
Any real gains to businesses will be eaten up by inflation anyway.
This is nothing more than political ineptitude at its finest.
Time for tax reform in Australia
However, the corporate tax rate in Australia is high. And paying exorbitant amounts of taxes to the government certainly stifles business investment in the long run.
Furthermore, if the government would simplify the taxation system, there’d be no need to employ accountants looking for loopholes to reduce the amount of company tax paid.
In saying that, it’s rather convenient for company bosses to be jumping on the ‘if you copy the US, we’ll pay people more’ line.
For starters, CEOs in Australia aren’t fools. They see the same data we do. They’ll be well aware that the lack of wage price growth is an issue for both the federal government and the Reserve Bank of Australia. They’re latching on to a popular cause rather than increasing wages. But using Walmart as an example of increasing wages because of tax cuts doesn’t take into account the full story.
Walmart claims it ‘immediately’ began increasing the minimum wage after Trump’s tax cuts were passed. In January this year, the base wage went from US$10 to US$11.
But it turns out that Walmart was selective in timing wage increases.
In early 2015, the retailing giant bumped up its minimum wage to US$9 an hour. At the time, it was a widely advertised moved. The company wanted to pay more in order to attract the best staff.
A year later, in 2016, Walmart did it again, jacking up the minimum wage to $10 an hour. With Trump’s election, Walmart then had the power to hold off any further rate increases and time it with Trump’s tax cuts package gaining approval.
Nonetheless, Walmart’s 22% increase over the past three years was already underway. With the employment rate in the US falling, keeping staff was becoming increasingly difficult.
In other words, if Walmart wanted to retain the people it had, it was forced to increase the minimum wage.
These are market forces at work. And it’s how a free market should work.
Employers notice these trends. And if they plan on keeping their skilled team together — in order for their business to run smoothly and efficiently — they must pay their workers accordingly.
Now while I broadly support tax cuts for large corporations, what Woodside and Qantas are doing is holding the government to ransom.
If they truly believed they’d lose their workers to higher-paying jobs, you can bet that both companies would begin to increase wages.
The fact is, employers currently feel secure with the employees they have. So they don’t have to offer more pay.
As multinational corporations around Australia beg the Aussie government for tax cuts, you can bet that a few will start increasing wages.
And that wage growth will remain low for another year.
Editor, Markets & Money