The Turnbull government company tax cut is a bad move

Photo from the Australian: Malcolm Turnbull and his government forced into temporary retreat on company tax
Contributed by Joe Montero

The Turnbull government claims that its company tax cut will increase wages or create more jobs. But a secret survey conducted by the Business Council of Australia and reported in the media, shows that more than 80 percent of companies will use the gain to boost returns to shareholders or invest in the company.

The failure of Senators Derryn Hinch and new South Australian senator Tim Storer to agree, has postponed the legislation for now. It will be brought forward again, during the budget season in May. nevertheless, the delay has provided a small window of opportunity to get the truth out.

One point needs to be made clear first. One of the assumptions of the argument for the cut is based on is that companies pay the 30 percent tax rate. In the real world, most of the big players pay no more than 5 percent. Many pay nothing at all. Let’s go along with the game anyway, and assume that they do pay the full rate. The cut will still not lift wages and create new jobs.

To see why is the case, it must be understood that this is a tax on profit, which results from through revenue coming in. Wages and jobs relate to costs.

Broadly speaking, there are two types of costs, constant (or fixed) costs and variable costs.

Constant costs involve assets that are long lived, like the place in which the business is conducted and equipment. They are acquired ahead of time and slowly used up. The quantity cannot be changed in the short-term. A critical feature of constant capital, is that larger the volume of business, the more the cost is spread out. This means the per unit cost goes down, as volume increases and it goes up as volume increases.

Variable costs are mostly the cost of labour. The quantity of labour employed is much more flexible and can therefore be changed in the short-term. It rises and falls along with changes in the volume of business and variable costs will therefore remain the same per unit.

These two types of costs exist within the context of the existing economic conditions. When they are not favourable, as is the case now, the margin, which is the difference between costs and revenue tends to shrink. The incentive in these circumstances is to either expand by raiding the shares of other companies or to cut costs. Both are now taking place in Australia on a major scale.

It does not take a genius to work out that, because in the short-term constant costs are set in concrete, it is variable costs that are going to be cut back. This is achieved by lowering wages, applying greater flexibility to the hours of work (casualisation), or raising the pace of work. The extent to which these measures are applied, is usually proportionally inverse to the growth of business activity. in other words, the smaller the growth, the bigger the attack on wages and hours.

In the longer term, the incentive to cut costs takes on the form of replacing labour with new technology. This cuts the cost of variable capital too, because fewer need to be employed and this is the best way to increase labour productivity, which means, increasing the volume of work over a given time.

This shifting of the mix from variable to constant capital, is dependent on doing business on a bigger scale. When the capacity to do this is not there on a sufficient scale, there is a problem and companies get around this by pushing the cost of variable capital down further.

Individual companies may be able to escape the effects by transferring them onto someone else, whether it be their workers, the competition or customers. When it comes to the economy as a whole, the aggregate balances out and there is no escape. This is what is most important. Depressing the wages share depresses the available market, and it further reduces the capacity for business  investment in the real economy and grow. The economic data has been telling us this all along.

Paying less company tax will not change any of this and lead to higher wages and more jobs, when the key factors that determine this are pointing the other way.

Companies  operate on the funds coming in from shareholders, and to maintain this flow, they must pay back dividends that are large enough to keep the money coming in.  When this appetite cannot be fed sufficiently from the revenues coming in from doing business, they are fed out of savings made on variable capital. Thus, the shift of national income from wages, to the major shareholders.

A cut in company tax will be used to top up dividends, may be used to buy shares in other companies, or invested in shedding still more labour.

The business Council of Australia survey confirms this. It shows that less than one in five leading chief executives say they will use the well advertised $65 billion projected gain, to raise wages and create more jobs. More than 80 percent will use it to boost returns to shareholders or invest in the company. If the investment is not used to increase the volume of business, or buy shares in other companies, it will be used to impose further cuts on the wages share.

The inescapable conclusions are, one, that the argument for the reduction of company tax is based on a lie, and two, that these tax cuts are bad for the economy and unfair.

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