Turnbull Government's mad rush for corporate tax cuts

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Corporate tax cuts are only good for foreign shareholders and income inequality — we've seen it before, writes Arthur Marusevich.

WHAT A SURPRISING coincidence that just as U.S. President Donald Trump signed the biggest tax cut Bill in U.S. history, here in Australia, the Government resurrected its corporate tax cut Bill back to the House of Representatives for further debate.

And although the plan stalled at the second reading debate in the Senate, its passage is only a matter of time.

Here’s why it’s a bad idea.

The Bill is designed to progressively reduce the corporate tax rate from the current 30% to 25% by 2026 for all entities. The Government claims the Bill will encourage investments and increase wages. Yet no matter how hard the Government tries sell the Bill’s purported benefits, the reality is – and as history taught us – its purpose stands on a very shaky ground.

A comparative study

Between 1996 and 2006, investment income in the U.S. was the largest contributor to income inequality. Then the Bush tax cuts, born in 2001 and 2003, reached a new milestone of the economic downturn: income inequality, fiscal crisis and a massive budget deficit.

In fact, some economists suggest that a quarter of the nearly US$17 trillion (AU$22.5 trillion) deficit by 2019 will be accounted for by the Bush Administration tax cuts. The Bush tax cuts, which significantly reduced top marginal tax rates and capital gains tax, also brewed income inequality: as the tax rates decreased for the top 0.1% of earners, their percentage of income substantially increased.

In Australia: Enormous profits, meagre tax payments

Why is it the case in Australia that when companies do not make a profit, they are quick to avail the “companies only pay tax on profits” rule to avoid paying taxes? Whereas when the same companies make huge profits, instead of paying their fair share of taxes, they turn to loopholes to again avoid paying taxes? So, from the outset, more than any form of a rant, the standard narrative that “companies only pay tax on profits” is, in my opinion, the biggest rant of all.

Take the example of RTPDS Aus Pty Ltd, an entity owned by mining giant Rio Tinto. In 2016, the company received a tax bill of $6,375 against a taxable income of approximately $15 billion. That comes to approximately $1 in tax for every $2.2 million earned. Now, we can all understand that this was because of the slump in commodity prices. However, the same company, whose profits in 2017 were up from 2016 by a whopping 90%, is now fighting an allegation of what is known as a "Singapore tax sling".

In its simplest terms, a "Singapore tax sling" is a tax avoidance mechanism whereby a company transfers its Australian profits to the low tax jurisdiction of Singapore to record reduced profits in Australia and thereby pay less tax.

Credit to the Federal Government’s recent initiative to crack down multinationals, Rio Tinto has now been hit with an additional tax bill. But what hasn’t changed is the attitude of Rio Tinto and the likes of it challenging the Australian Taxation Office for every dollar of payable tax. Even our beloved Qantas – who we all bailed out in 2015 so it could make a $1.4 billion in profits in 2017 – instead of repaying the favour, now wants further tax cuts.

So, the ultimate question is: if the proposed tax cuts go ahead, what’s in it for the Australian public? The short answer is: next to nothing.

Instant wage increases?

While the Business Council of Australia is urging the Government to pass the corporate tax cuts legislation, a big question mark hovers over the claim that it will result in higher wages for Australian workers.

For instance, at least half of the companies whose senior executives have signed an open letter to the Senate urging it to pass the legislation didn’t pay any company tax in 2015-16. If such a trend were to continue, how convincing is it that these companies would pass any of the 5% tax cut to their workers? The only convincing outcome is that these companies will be required to pay taxes sooner than they would under the current 30% rate — and any instant wage increase is highly unlikely.

Benefits to small and medium businesses

Paul Keating best explained why any company tax cuts will benefit large businesses at the cost of locally owned unincorporated business:

Australia’s dividend imputation system works such that the company tax is, in effect, a withholding tax — a tax temporarily held by the Commonwealth which is returned to shareholders when their dividends are paid. So, whether the company tax is withheld by the Commonwealth at a rate of 30% or 25% is immaterial — the Commonwealth is going to return the money to shareholders anyway, regardless of the rate. But the shareholders who will receive a benefit are foreign shareholders.

Considering Mr Keating’s explanation, when you have some 98% of locally owned small businesses employing four or fewer employees and around 30% of large business employing more than 200 workers with some component of foreign ownership, it is not difficult to conclude that large businesses and foreign shareholders will benefit most from any potential company tax cuts.

Budget deficit

Leaving aside the issue of who will benefit most from the proposed company tax cuts, even Reserve Bank Governor Philip Lowe has warned that any corporate tax cuts should not be at the cost of higher budget deficits. Yet the Turnbull Government is somehow in a mad rush to pass the legislation without clear explanation how the $65 billion blowout to the budget is intended to be recovered.

Don’t worry though, I know the answer. Future spending cuts and increases in personal income tax is likely how the budget deficit will be repaid.

Arthur Marusevich is a Canberra-based lawyer. You can follow him on Twitter @AMarusevich and find his website here.

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