Contributed by Joe Montero
The Australia Institute, has questioned the wisdom of cutting company tax and published a report that says research shows that many of the biggest companies operating in Australia will not use their tax savings to invest in Australia and create new jobs. This is based on the 15 companies that would pocket a third of the tax cut.
The government has not provided convincing evidence that there could be an alternative outcome.
Other countries have cut company tax and the main argument from the supporters of the cut is that if Australia does not follow, investment will flow out of Australia and into these countries that have now become more attractive to the corporate world.
But there is a body of evidence that suggests tax cuts are only one factor in any decision to shift investment from one place to another. At the end of the day, business operates to make the maximum profit and profit is derived from putting labour and other resources to work, at the maximum pace, over a given period of time. In other words, profit is made if there is sufficient productivity. There must also be a market.
This is basic stuff. If enough goods and services can be made and they can be sold, there will be investment. Other factors are secondary to this and especially so, when it comes to major corporations that already have or have access to a ready pool of funds.
In that case, what may be driving the push to lower company tax? Outside the case for small business, where at least on paper, it does have case, based on much less access to investment funds, there can only be a rational that is other than what is stated. This is not hard to find.
In the depressed economic climate that has been around for decades and worsening in recent years, the rate of return on investment has halved. An indicator has seen the long-term downward trend in the share and bond markets.
According to Australian Bureau of statistics (ABS) data, employment, wages and the cost of employment have remained fairly static. There have been modest growths in consumption and returns on investment, the highest being in health services and real estate. This suggests that there is a productivity problem other than labor costs.
One explanation is that the proportional shift, increasing the use of technology and reducing the use of labour has caused a lowering of value, which has translated to a lowering of price, which in turn, is concentrated at the high tech product and service end. The problem is that Australian consumers have not been able to keep up with the required increase in consumption that is needed by increased productivity to close the gap.
Increased productivity per say and government subsidy of major corporations through tax reduction are not just wrong. They are harmful. Increasing productivity further, without a corresponding change in the environment in which it operates, can only exacerbate the problem. Requiring less tax to be paid will mean more going to pay dividends to share owners and lift share prices, without translating into investment in economy.
Investment is needed. More than anything, it is needed to build new industries. The private sector is not doing this on a sufficient scale, because the economic conditions are not conducive to this. It requires government intervention. Tax cuts will reduce the governments capability. It would be much more productive to do something to tackle the huge tax avoidance industry.