No link between company tax rate and economic growth

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Australia, Canada, company tax, corporate tax, downturn, economic growth, employment, France, GDP, Germany, government debt, GST, jobs, labor, personal tax, Scott Morrison, sugar hit, tax cuts, tax havens, Trump, UK, United Kingdom, United States, US

In Australia, our treasurer Scott Morrison still wants to reduce the corporate tax rate from 30% to 25%, mainly it seems because the US has reduced its rate from 35% to 21%. I commented as follows on Morrison’s Facebook page …

This is the greatest load of twaddle since climate change denial. There is no evidence that corporate tax cuts lead to growth and jobs. There are so many other factors influencing growth.

The UK has had seven cuts to its corporate rate in 10 years from 30% to 19% and its GDP growth is down to 1.7%. Its top personal rate came down from 50% to 45% in 2013. Its GST rate is 20%.

France’s corporate tax rate has been 33.3% since 2007. GDP growth has increased to 2.3% over the last year after being around 1% for a number of years. Its top personal rate went up to 50.3% in 2012 from about 46% and its GST rate is 20%.

Germany’s corporate tax rate has been 29-30% since 2008. GDP growth has increased from 1.8% to 2.8% over the last year. Its top personal rate is unchanged at 47.5% and GST is unchanged at 19%.

Canada’s corporate rate has been at 26-27% since 2012 after reducing four times from 31.4% in 2008. Growth fell to 0.3% in 2015. Growth is now up to 3.0% despite the top personal rate increasing from 29% to 33% in 2016. It has a social security rate of 14.4%.

The US corporate rate has been around 35% since the late 1980s and overall the economy doesn’t seem to have suffered. Add another 5% on average for state income tax. GDP growth is currently 2.3%. Top personal rate went from 35% to 39.6% in 2013. Social security rate is 21.3%.

Our corporate tax rate has been 30% since 2002 (average rate is 17% and effective rate 10.4%). But our GST is only 10%. Our GDP growth is up to 2.8% although it would be around 1% if federal government expenditure was reduced to equal revenue. Quite a few countries might have a corporate rate lower than ours but they have a much higher GST while personal rates are similar. GDP growth varies among countries but there doesn’t seem to be any correlation between tax rates and GDP growth rates.

Most countries have a large government debt, and tax cuts at this stage will make this worse. As a few commentators have suggested, tax cuts will be like a sugar hit. There might be some short term gains (including for tax havens, I presume) although these will be small and uncertain, but there will be long term pain, especially if there is another world downturn.

We don’t need to get into a race to the bottom with the US. Our investment from overseas grew 39% in six years under Labor and has continued to increase steadily. Trump met with his bankers in the 1990s when he was busy sending his casino broke. One of them said later that talking to Trump was like talking to someone who had skipped economics and accounting classes at college.

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Australia: Corporate tax cuts are not the answer

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Australia, banks, branches, budget, Canada, Coalition, companies, consumer confidence, corporate, corporation, debt, deficit, demand, GDP, Germany, goods and services, government, growth, GST, investment properties, overseas holidays, profit, revenue, shareholders, staff, state income tax, tax, tax cuts, tax plan, Trump, UK, US, wages

The Australian government wants to give corporations a $48 billion tax cut believing this will help growth and the budget. It will help neither. I posted the following to an article at The Guardian today. See https://www.theguardian.com/australia-news/2017/jan/27/australia-doesnt-need-to-chase-donald-trump-on-corporate-tax-cuts?utm_source=esp&utm_medium=Email&utm_campaign=GU+Today+AUS+v1+-+AUS+morning+mail+callout&utm_term=210611&subid=11379209&CMP=ema_632#comment-92056553

The main effect of a $48 billion tax cut for corporations would be to blow the deficits and debt out even further. There would be no guarantee that companies would invest more or hire more staff if they had a tax cut. Companies will only do this if there is an increase in demand for their goods and services. But with wage increases at a historical low and consumer confidence fairly low, it’s not going to happen. Besides, imagine the banks opening more branches and employing more staff if the banks paid less tax. There’s no way. The banks have made billions in profit for years, yet they close branches and lay off staff. The extra money from tax cuts would probably largely find its way into shareholders’ pockets and a fair chunk will probably be spent on additional overseas holidays (where the money of course leaves Australia) and on more investment properties (which would mean these people pay less tax, and the rich become richer and the poor become poorer paying ever higher rents). 

There is no evidence that corporate tax cuts work. Indeed, the UK and Canada have reduced their corporate tax rates about half a dozen times in eight years but it hasn’t done much at all for growth. The US and Germany have kept their rates the same and their growth, if anything, has been better than the UK and Canada. If there was evidence that corporate tax cuts worked, then everyone would be doing it. GDP would grow and deficits would fall due to more tax revenue. It just doesn’t work like that. The only place it works is in the minds of the hard right. 

It’s no use copying what Trump plans to do. Trump has no idea when it comes to money. When his casino got into trouble in the 1990s (largely due to Trump), the banks had a meeting and one banker was later quoted as saying that Trump didn’t know numbers and it was like he hadn’t taken any economics or accounting courses at college. 

We also should keep in mind that the Coalition’s tax cuts policy is tax plan C. Plan A was to hike the GST from 10% to 15%. That was abandoned when the government realised that nobody liked the idea. Plan B was state income taxes. But that wasn’t popular either and was abandoned within days when it became clear that the idea was impractical and the states didn’t want a bar of it. Then we ended up with plan C: the corporate tax cuts plus cuts for wealthy individuals. 

The Coalition government doesn’t seem to have much more idea than Trump.

Australia: Don Argus incorrectly blames Labor

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Australia, Canada, capital gains, China, Coalition, debt, deficit, Don Argus, Donald Trump, economy, expenditure, exports, finances, GDP, Germany, GFC, global financial crisis, government, housing prices, Joseph Stiglitz, labor, mining, negative gearing, recession, revenue, stimulus packages, tax, tax concessions, tax cuts, taxes, UK, unemployment, US

An article appeared in The Australian on 12 December 2016 in which former National Australia Bank CEO Don Argus accused the Labor government of 2007 to 2013 of spending up big and putting a “dead weight” on the country’s finances. He complained about the government’s “cavalier approach to spending” in 2008. Not a scrap of data was provided to back up the claims. See http://www.theaustralian.com.au/business/don-argus-says-ruddgillard-spending-weighs-on-economy/news-story/a89fdbb6f0a4c3b6d94bcd192eaafc05.

For a start, the stimulus packages were not announced until February 2009. They totalled about $52 billion and the reason for them was to keep the economy out of recession in the face of the global financial crisis. Australia’s GDP growth fell to about 1% and without the stimulus packages, the economy would have contracted by around 2.5%. This would have resulted in many more businesses going broke or being in trouble and a considerably higher unemployment rate.

Expenditure as a proportion of GDP in 2007-08 (Labor was in office for the last seven months) was 23.1 %, the lowest it had been since 1989-90. It rose to 25.1% in 2008-09 and 26.0% in 2009-10 with the stimulus packages. It then fell to 24.5% in 2010-11, 24.9% in 2011-12 and 24.1% in 2012-13. Since mid September, the right wing Coalition government has been in office and expenditure rose to 25.6% of GDP in both 2013-14 and 2014-15 and 25.8% in both 2015-16 and 2016-17 (projected).

When the GFC hit, revenue went through the floor. It had been 25-26% of GDP in the years before the GFC. It then fell to 23.3% in 2008-09, 22.0% in 2009-10, 21.4% in 2010-11, 22.1% in 2011-12 and 23.0% in 2012-13. This is the main reason for the deficits and debt in that period rather than the extra expenditure to keep us out of recession. It is sometimes thought that mining and exports to China saved us from recession (rather than the stimulus packages). But gross value added by mining grew by about $3 billion in 2008-09 and exports to China by around $12 billion, which together was about 1% of GDP.

Australia came out of the GFC with the third lowest government debt to GDP ratio of the 34 OECD countries. Many commentators have applauded the Labor government’s efforts during this time. Nobel prize winning professor of economics Joseph Stiglitz of New York said: “You were lucky to have, probably, the best designed stimulus package of any of the countries, advanced industrial countries, both in size and in design, timing and how it was spent – and I think it served Australia well,” http://www.abc.net.au/news/2010-08-06/stimulus-served-australia-well-despite-waste/935002 The article also stated that Stiglitz felt that such programs are “preferable to the waste of human and capital resources that would have resulted if there was no stimulus.” The packages weren’t perfect at such short notice but they did the trick.

Expenditure has risen under the Coalition government. Also, it doesn’t seem to think there is a revenue problem, which we’ve had since the GFC. It was 23.5% of GDP in 2015-16, still a couple of per cent below pre-GFC. The Coalition wants to give corporations a $50 billion tax cut, which Argus and others support. But consumer demand for goods and services isn’t there, which means that tax cuts will be unlikely to go to business investment. They will more likely go to shareholders, which is likely to result in more money spent on overseas holidays and more residential investment properties. Any tax cuts will also make the deficits even larger. The UK and Canada have reduced corporate tax rates half a dozen times over the last eight years. The US and Germany hasn’t, but if anything their economies have done better than the UK and Canada.

Overly generous tax concessions (negative gearing and capital gains exemption) to investors in residential property have been another major problem in Australia and an important reason the economy is underperforming and the deficits are larger than they should be. Our housing prices are among the highest in the world and first home buyers have been priced out of the market by speculative investors in property pushing up demand, prices and rents.

Don Argus also said we are “becoming one of the highest-taxing economies in the OECD”. This is simply not true either. We are one of the lowest if company and personal taxes, GST type taxes and others are taken into account. Our GST rate is especially low. He mentions Donald Trump proposing to reduce the corporate tax rate to 15%. This will have a devastating effect on the budget. Deficits and debt will grow. Services such as health, education, law and order, and roads will decline, and the economy will struggle even more than now.

If Argus and a few other commentators on the right had a look at the facts and figures, they might not come up with such outlandish and incorrect statements.

Australian politics: budget saga

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Abbott, Australia, bracket creep, budget, budget emergency, carbon pricing, Coalition, debt, deficits, economy, expenditure, fiscal policy, GDP, GFC, GST, Hockey, Joe Hockey, Malcolm Turnbull, Morrison, politics, property investment, revenue, Scott Morrison, Senate, stimulus packages, superannuation, surplus, tax avoidance, tax concessions, tax cuts, tax evasion, taxation, taxes, Tony Abbott, Turnbull

Here’s what I posted as a comment to Business Spectator and the Conservation sites yesterday. The Coalition is struggling with the budget but don’t seem to have many ideas up their sleeves. Malcolm Turnbull and Scott Morrison have replaced Tony Abbott and Joe Hockey, but this doesn’t seem to have made much difference …

The Coalition has now spent 2.5 years treading water on revenue issues. I’m not sure Morrison and Turnbull have much more of an idea than Hockey and Abbott. If another 2% of voters (i.e. swinging voters) feel this way in the next few months, the government could be in trouble, and remembering that the Coalition only had about 46-48% of the vote under Abbott.

Abbott and Hockey talked of a ‘budget emergency’, which was always nonsense. Then they proceeded to chop taxes and spend a heap on pet projects. That was never going to fix the budget. The measures that would have hit the sick, the poor, the old and the young, but didn’t get through the Senate, would have given the budget some slight short term relief but no good for the economy, or the budget in the longer term.

Morrison still doesn’t seem to think we have a revenue problem. We’ve had a revenue problem since 2008 when the GFC sent revenue through the floor (as it did in countries all around the world), falling from 25-26% of GDP to 21.5% in 2010-11. It still hasn’t recovered (at 23% of GDP), unlike the situation in many countries.

Morrison and Turnbull seemed to be testing the waters on increasing the GST. That didn’t work and they more or less dumped it but not quite, which caused various contradictory statements. Now it’s totally dropped but they don’t seem to have anything else specific. This showed in Morrison’s nothing talk to the Press Club.

There are all sorts of things the government could do but they don’t seem to want to. The government needs to look at things like tax concessions on superannuation, property investment, etc at the high end, corporate tax avoidance and evasion, carbon pricing (its abolition is costing the budget $18 billion over four years according to the Parliamentary Budget Office), etc as well as some expenditure cuts (expenditure is at 26% of GDP; it was 24.9% in 2008-09 to 2012-13 and that was with the stimulus packages to keep us out of recession; mining and China wouldn’t have been nearly enough) before it can reasonably think about income tax cuts. Or they will never come close to a surplus, let alone reducing the debt.

Then there’s bracket creep. Treasury modelling showed the average tax rate would go from 24.4% to 26.6% by 2020-21. Morrison described it as a job killer and growth killer. Theoretically, that would be the case if the money isn’t spent. But it’s a trade-off between growth and reducing the deficits and debt. I’d probably let bracket creep go another couple of years and implement the measures I outline in my previous paragraph. Federal government debt has increased from around $265 billion to $410 billion under the Coalition, or about $5 billion a month, and the deficit is twice what it was in 2012-13.