Shabby deals, poor policy

The latest piece of nonsense from the Australian government is cutting the company tax rates for business with turnover of $50M or less. As announced Friday, it will fall from 30% to 27.5%. The government will claim an economic driver for this, but really it’s all political. It’s theatre, which accounts for much of our politics these days. This is something government hung its hat on and was determined to drive through by hook or by crook. Originally they sought an across the board cut to business tax rates, but that was never going to happen – but anything was better than nothing.

In a time of so-called budget emergency and with a growing deficit – not to mention a range of essential services like health and education being constrained – giving a tax cut to big business was always going to be a difficult political argument. Not surprisingly the ALP opposed it, as did most of the cross-benchers, and public sentiment was against it also. In the end a watered down version only got through because of a now routine shabby back-room deal, this time with Nick Xenophon. But at least the government could claim a victory of sorts, and that’s what all this was about.

There is very little good in this. The myth of cutting company tax rates creating economic growth is right up there with the unicorn. There is no evidence anywhere that it works, despite it being a popular piece of dogma around the world for the decade or so. It’s similar to the old-fashioned and similarly ludicrous ‘trickle-down’ economics espoused by Reagan when he was president. It just doesn’t work.

The idea is that if you give more money to the people at the stop of the pyramid they’ll spend or invest it and it will trickle down towards the poor sods at the base of the pyramid holding it up. It’s the same sort of ill-considered philosophy that saw Sunday penalty rates cut recently – the notion being that it will make small business more profitable, meaning they could do more, and maybe even pay their staff more. No-one believes that, and not only is it unfair to the person who gives up their Sunday to work, it overlooks some pretty basic economic precepts.

Economic activity is predicated on money circulating through the economy. You want money in people’s hands, and you want them to spend it. It’s one of the major arguments for tax cuts in general. The problem here is that by reducing penalty rates you’re taking money out of people’s hands. It means they spend less and economic activity diminishes in that sector (not to mention quality of life). The irony in this case is the unforeseen impact on tax revenue. Everyone knows that overtime gets taxed more – as soon as you reduce it you also reduce income tax revenue, which impacts on all of us. Just stupid all round.

It’s the same with cutting company tax rates. I’m not against reducing tax, but it has to be for the right reasons, and preferably directly linked to productivity targets. The reasons stated here are just bogus. The majority of the cuts will go towards profit, shareholders or CEO wages and bonuses. Some will likely be invested, but very little will go towards better employee wages. And it’s likely to make not one whit of difference to international investors looking for somewhere to invest.

What it does do is drastically reduce government tax revenues – when already there is insufficient. It further entrenches inequity of a system where low income workers carry the greater share of the burden while having services they rely further cut. It’s disgraceful, and really does beg the question: who does the government govern for? Is it for the people, or for big business? We know the answer to that, and the reasons are all political – big business is the biggest donor to Liberal party funds. This is payback.

It’s hard to look upon Nick Xenophon with anything but contempt after this. I used to respect him, but he’s cut a deal to suit his own political agenda, and betrayed his greater responsibility to the Australian people. In exchange for his vote he’s negotiated a one-off payment to pensioners – I hate one-off payments; and negotiated government investment in a thermal plant for his home state of SA.

As far as I’m concerned the final result is almost the worst possible outcome. Because there is a cut-off amount it will increase red-tape and encourage rorting, if not outright corruption. It complicates a tax regime when we should be simplifying it, and will certainly drive work to the finance sector to account for this increased complexity, and no doubt to set-up complex company structures to ensure revenue is under the $50M cap to take advantage of it. And because it is gifted, rather than tied to productivity incentives, it’s unlikely it will lead to any meaningful business investment.

You and I get nothing from it, indeed, we probably lose more now as decreased tax revenues doubtless lead to a further contraction of essential services.

Turnbull can crow about it, but it’s a miserable outcome for this country.

 

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