I couldn’t watch the entire Henry v Senate episode this morning. So I missed this bit
Asked about the Opposition leader’s claim that the tax would hit the cost of living, Dr Henry said he had learned in high school that a “profits-based tax should not affect prices.”
“Prices should not be affected,” he said.
Now I don’t want to comment on what Henry did or didn’t learn at High School but I would hope that he didn’t learn that. I know that he actually doesn’t believe that. This morning he explained to Doug Cameron that the incidence of corporate tax probably fell on Australian workers. I agree with that point. Now it can fall on workers, or capital or consumers. Henry explained that it doesn’t fall on capital – Australia is a small capital importing economy and foreign investors won’t wear the incidence therefore it must fall somewhere else. Henry said it falls on workers – he said nothing about consumers. Now remember corporate tax is a tax of profit and Henry has already admitted that it affects the price of labour.
Now let’s have a look at what Greg Mankiw says.
But before deciding that the corporate income tax is a good way for the government to raise revenue, we should consider who bears the burden of the corporate tax. This is a difficult question on which economists disagree, but one thing is certain: People pay all taxes. When the government levies a tax on a corporation, the corporation is more like a tax collector than a taxpayer. The burden of the tax ultimately falls on people—the owners, customers, or workers of the corporation.
Many economists believe that workers and customers bear much of the burden of the corporate income tax. To see why, consider an example. Suppose that the U.S. government decides to raise the tax on the income earned by car companies. At first, this tax hurts the owners of the car companies, who receive less profit. But over time, these owners will respond to the tax. Because producing cars is less profitable, they invest less in building new car factories. Instead, they invest their wealth in other ways—for example, by buying larger houses or by building factories in other industries or other countries. With fewer car factories, the supply of cars declines, as does the demand for autoworkers. Thus, a tax on corporations making cars causes the price of cars to rise and the wages of autoworkers to fall.
Now I don’t want to over-emphasise the point here, but corporate tax is a tax on profit and Mankiw tells us that it can influence prices.
The Henry Review indicates that corporate tax has a high(ish) deadweight loss (about 40c in the dolar) – the RSPT is a tax on income (not rent) and we need to see what deadweight loss it has. Right noe Treasury are assuming it is close to zero, if not actually zero.
Update: The Hansard of yesterday’s Senate hearing is available. Here is the full quote of Henry’s comment (pg. E20).
Senator PRATT—As part of the debate around this issue, there has been a scare campaign running saying that the RSPT will put pressure on the cost of living. I have not been able to find any credible economic analysis that substantiates this, so I would like to know your analysis of this issue, and might consumers in fact benefit from reductions in company tax overall?
Dr Henry—I could start with where I left off with Senator Joyce: a tax that does not affect the level of economic activity cannot either affect prices unless demand curves are vertical. I have not heard anyone suggest that demand curves are vertical. A profits based tax should not affect prices. A lot of people have suggested that a profits based tax will affect prices. I do not know; I learnt in high school in the study of economics that profits based taxes cannot affect prices. I will leave the matter there.
On the other hand, changes to the company income tax rate can affect prices and the reason is that—and, again, this is something I would have learnt in high school—if you shift the supply curve up into the left, prices go up. That is what an increase in the company tax rate would do. I also learnt in high school if you shift the supply curve down into the right, which is what a cut in company tax rates would do, you get a reduction in prices; I remember that. But when you impose a tax on the pure profit, you do not actually shift the demand and supply curves—I remember learning that—so the price should not be affected.
Just to repeat – the corporate income tax is a tax on profit. Henry, I suspect, meant to say a tax on rent cannot affect prices. In theory that is true, that is one of the major theoretical benefits of a tax on rent. Pity nobody seems to have asked him how he knows that his proposed tax is a tax on rent and not a tax on profit.
He get worse every time he speaks now.
Didn’t prices of food staples react as a result of the tax incentives given to US farmers to grow corn for ethanol thereby causing a shortage around the world. We almost ran out of corn that year and there were famine riots.
When asked what he thought of Henry, having been the person who hired him for the job, Costello said that he always thought Henry was a good tax expert. Pressed to elaborate Costello he avoided using Henry for other advice in the area of economics etc.
JC
27 May 10 at 9:40 pm
In high school? Really?
I can hear the narrator now:
‘while his classmates were out drinking and partying, Ken stayed home reading up about taxation. Little did the young Kenneth know, but almost 40 years later this sacrifice would pay off as he deployed this knowledge while fronting Senate Estimates as Secretary…’
asf
27 May 10 at 10:36 pm
He is starting to sound like Rudd – condescending.
I learned in high school that we should have “from each according to his abilities, to each according to his needs”.
Fortunately I unlearned this at the ANU.
Samuel J
28 May 10 at 6:56 am
Samuel J, whilst I recognise that as the slogan of communism and can accept that communism applied wholesale has been debunked, do you see no merit at all in that phrase?
It is worth pointing out Grog’s Gamut has had a go at explaining Ken Henry’s words here: http://grogsgamut.blogspot.com/2010/05/on-qt-high-school-economics-and.html
Senexx
28 May 10 at 11:05 am
Yes, he’s very condescending and he also leaves himself open to serious comebacks that would the douche bag right in his box.
I recall he gave Joyce a hard time about having a “simplistic” opinion on some matter.
Yet he was the genius that informed us publicly that he decided to move on the bank guarantee and fiscal stimulus after he had a conversation with his mother who told him she was worried about the bank she used.
That’s downright embarrassing to admit that in public.
If only Joyce had used the comeback it would have knocked him out for all time.
JC
28 May 10 at 11:16 am
How is Mrs Henry these days?
She must be really tired after working on the tax review.
C.L.
28 May 10 at 11:19 am
wow Forrest being dishonest.
Fancy that.
He didn’t move on that at all.
that was the end of a myriad of situations that confirmed that something had to be done and confidence was very poor.
Never mind Forrest be dishonest about something else as well.
you are very good at that.
Butterfield, Bloomfiled & Bishop
28 May 10 at 11:58 am
do you see no merit at all in that phrase?
.
there is no merit in it and I’ll tell you why.
It is fundamentally a command-and-control idea… with the word “take” and “give” invisible, yet present. Plus the identity of who should do this giving and taking, the state. So therefore, it really reads: “(The government should) take from each according to his abilities, and give to each according to his needs”.
.
Once you make explicit these hidden assumptions, it starts to look less like a pretty golden rule, and quite menacing.
.
It acknowledges that people have differing abilities and needs. Perhaps that is why you think it has merit, but that’s simply an observation, a fact of life.
daddy dave
28 May 10 at 12:40 pm
I think I’m going to ignore Homer from here on. There is simply nothing to be gained by arguing with him.
daddy dave
28 May 10 at 12:41 pm
The phrase only has merit in education if it is taught as part of a reading of ‘Animal Farm’.
asf
28 May 10 at 1:18 pm
I don’t want to comment on what Sinclair Davidson did or didn’t learn at high school, but I hope he didn’t learn that a tax on the profits of Australian mining companies affects global commodity prices. I don’t know whether he believes that or not, but if he does, he’s a moron…
MR
28 May 10 at 3:49 pm
I see you are prepared to make churlish remarks about what Ken Henry did or didn’t learn in high school, but are not inclined to have the same directed at you. No matter. Back in the real world your academic argument is utterly meaningless unless you are prepared to assert that the tax as it is currently proposed will or is likely to have an impact on the prices of commodities sold by Australian mining companies. Yes or no professor?
MR
28 May 10 at 4:58 pm
“I don’t want to comment on what Sinclair Davidson did or didn’t learn at high school, but I hope he didn’t learn that a tax on the profits of Australian mining companies affects global commodity prices. I don’t know whether he believes that or not, but if he does, he’s a moron…”
That’s what the super tax gang believe. Who are we to second guess what they say? We’re not inclined to have the same doen to us.
Semi Regular Libertarian
28 May 10 at 5:00 pm
MR;
You sound very nervous and twitchy. What’s wrong?
JC
28 May 10 at 5:06 pm
“Back in the real world your academic argument is utterly meaningless unless you are prepared to assert that the tax as it is currently proposed will or is likely to have an impact on the prices of commodities sold by Australian mining companies.”
So he’s a moron if he believes this but he has no real world argument if he doesnt?
Dude, lay off the crack pipe.
Semi Regular Libertarian
28 May 10 at 5:10 pm
MR – Australia’s iron ore exports account for around 40 per cent of world exports for that particular commodity. The actions of BHP and Rio, can and do, alter world prices for iron ore.
asf
28 May 10 at 5:15 pm
Really asf?
The Government case for the tax continues to unravel.
Semi Regular Libertarian
28 May 10 at 5:19 pm
Indeed SRL, in value terms iron ore exports are only just shaded out by coal. We ‘only’ account for around 25% of world coal exports though.
But in one sense I agree with MR. If this government had tried this policy out on any ohter industry, the rest of the world would have hardly noticed. But no, they single out the only industry where Australia’s production actually matters – virtually guaranteeing that investors the world over would notice.
asf
28 May 10 at 5:42 pm
There no such thing as a super tax. Otherwise how does Wombat-Henry then explain the price signal.
Henry Ergas showed that mining profits have not been historically super anyway.
These profiteroles currently in government, took a 4 to 5 year period, ignored the fact that there are only few periods of good profit in the sector that investors bet on and then extrapolated out suggesting it will last into the sunset. That defies history.
They’ve been using the argument that the world is in a new paradigm shift and that there will huge demand for resources as far as the eye can see.
That exact same argument has been used every time there has been a commodity price boom and each time the price falls. The story of commodities is historically one of falling prices over the past 250 years.
How the hell do they know there won’t be huge finds elsewhere in the world or that substitutes possibly coming from the nanotech world won’t make all this stuff redundant over the next 30 years.
At the moment carbon substitutes for high strength are still very expensive.
However unless no one’s noticed a very large part of the Dreamliner’s body frame is being made in carbon and aluminum use is greatly reduced.
I keep saying that resources are simply a function of technology and not much else in terms of potential use.
IF you want to use less stuff that’s in the ground, reduce tax burdens on the economy as that will mean a greater portion of our income goes into R&D. This would invariably help in finding substitutes and will leave all this stuff in the ground if that’s what people want.
That’s why I can’t understand environmentalists.. at least those that aren’t romanticist live-in-the-wilderness type of trogs.
If you’re really pro- the environment you should be advocating very low tax burdens.
JC
28 May 10 at 6:20 pm
There’s tons of stuff being researched at the moment for carbon based nanotech to replace steel.
In the future we won’t need to dig this crap out of the ground as most likely nanotech fabricators will be making what we need by moving around atoms etc.
JC
28 May 10 at 6:30 pm
In relation to the Australian Resources Super Profits Tax and the wilful falsification of statistics by the Australian Federal Treasury in the Henry Review and the Treasurer’s media releases, I draw attention to the formal media release by the US researchers Markles and Shackelford, noting that tyheir paper was misused, was used out of context, and does not support the conclusions claimed by Australia’s Federal Treasury.
http://www.kenan-flagler.unc.edu/News/DetailsNewsPage.cfm?id=4767
May 25, 2010
“UNC Kenan-Flagler working paper debated in AustraliaA working academic paper by an accounting professor and a PhD student at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School is generating a lot of political interest in Australia.Kevin S. Markle, who will soon graduate from UNC’s PhD program, and Douglas A. Shackelford, the Meade H. Willis Distinguished Professor of Taxation at UNC Kenan-Flagler, are authors of the working paper, “Do Multinationals or Domestic Firms Face Higher Effective Tax Rates?” A June 2009 draft of the paper is posted on the National Bureau of Economic Research web site at http://www.nber.org/papers/w15091 .Members of the media contacted Shackelford and Markle after an Australian Treasury review into the nation’s tax system cited figures from their academic paper during a policy debate.The paper’s usefulness in formulating policy for one sector in one country should not be overstated, said Shackelford in response to one reporter’s query. “The purpose of the paper is to collect all data about the corporate income taxes paid by all publicly traded firms worldwide and thus provide at a starting point for comparing one country with another.”"Our research has been pulled into a policy debate currently unfolding in Australia,” said Markle. “We have read accounts of how by both sides of the debate have referenced our paper and members of the media have contacted us asking for our reactions and comments.”"We stand behind our research,” Shackelford said. “However, it appears to us that a tiny element of a very large study has been taken out of context and that proper consideration has not been given to the methods used to derive the number, the intent of the study, and the limitations of the findings for informing specific policy debates.”To help resolve misunderstandings, the authors provided the following comments. The purpose of our paper is not to study specific industries in specific countries. Nor is it to precisely calculate rates of tax that are paid. Our paper is intended as a broad comparison of effective tax rates across countries. All numbers in the tables in the paper are appropriately interpreted on a relative – rather than absolute – basis. The version of the paper cited is a June 2009 draft posted on the National Bureau of Economic Research (NBER) website. This draft is a working paper and has been through no peer review. Posting on the NBER website is not equivalent to publication; it is a venue for in-process research to be circulated for the purpose of sharing ideas and garnering feedback. As with other academic papers on the NBER site, we are in the midst of additional revision before submitting it for publication in a peer-reviewed journal. The entire controversy appears to center around the numbers reported in the “Mining” column of Table 4 of our paper. That table reports the results of our estimations of our regression equation on observations grouped by 2-digit NAICS codes and is included in their paper as supplemental analysis to determine whether the cross-country differences we observe when all industries are grouped together exist at the industry level. The data are for 2003-2007. We make an arbitrary cut-off for reporting of 20 observations. Thus, it is possible that the numbers for Australia represent average numbers for as few as four companies over the five years. As such, we reach no conclusions nor make any comments about individual industries in individual countries. Our purpose in producing the table was to make relative comparisons only. The data used in our study are from the publicly available financial statements of firms. We do not have data from tax returns or any other proprietary data. In the June 2009 draft, the “tax rate” used was calculated as total tax expense divided by pre-tax income, both taken from the financial statements. Our study is of corporate income tax rates only. We do not consider royalties, fees, value-added tax or anything else that does not get included in the total tax expense line on the financial statements. This is a limitation of our study which is due to data availability and we acknowledge it in the paper. In the most recent draft of the paper (March 2010), we changed our data source because it enables us to address the questions of our study more effectively. In this version, we do not have sufficient observations to include a number for the mining industry in Australia. This is simply a function of the coverage of the two data providers. The underlying data used in the June 2009 are all publicly available. Anyone interested in replicating the results in that draft would have access to all of the data that we used. We have read the analysis of Professor Sinclair Davison posted at http://catallaxyfiles.com/ and do not disagree with his conclusions. It appears that people have assumed that the paper is authored by Mr. Markle because his name is listed first. That is incorrect. In our field, the default convention for co-authored work is for names to be listed alphabetically. This final point is technical in nature, but since it has been raised multiple times, we include it here.To derive the numbers that are causing the stir, here is a description of what we did. We will simplify it to assume there are just three countries in the study: Australia, Canada and the United States.Go to the database and collect all firms that have the needed financial statement information (total tax expense, pretax income, ETR between 0 and 70%) and have 21 as the first two digits of their NAICS number. We then run an ordinary least squares regression on a model that has ETR = f(AUSTRALIA, CANADA, US, year controls, size controls). (We are ignoring the domestic/multinational split, which is just an additional split but uses identical intuition.) The estimate of the coefficient on AUSTRALIA (which is simply an indicator variable =1 for all Australian observations) is reported as the “Australian ETR” (the 17% that folks are focused on).Note that a regression framework is used only because it allows us to test for statistical significance of coefficients and to control for factors such as size. The estimates that come out are really just conditional averages. If the goal were to analyze the real taxes paid by the mining sector in Australia, our approach would serve, at best, as a very preliminary and rough analysis. That is not a goal of our paper.Even when one fully grasps what is being captured by our methodology, there are several possible sources of error in our measurement that we are forced to accept. The simplest example is an error in the data – the firm reports 1,000 but the database entry is 100. The greatest concern in our context is that the database contains a zero tax expense when the correct number is something positive. We attempt to mitigate concerns by dropping outlier ETRs, but this is not a perfect control.These types of issues become much more important as the sample becomes smaller. When we are using our full sample, we have some assurance that the effect of such errors will not affect inferences. Down at the industry level, however, where the sample is much smaller, the threat is much larger.If we had intended our paper to provide definitive answers at the country-industry level, we would have tested the robustness of those results much more thoroughly.”
angie
29 May 10 at 9:37 am
Sinclair, I think you missed an important distinction. Company tax is a tax on profit and the RSPT is a tax on pure profit. So as you can see, no wait a sec …
pedro
29 May 10 at 10:20 am
Pedro, exactly.
Sinclair Davidson
29 May 10 at 10:28 am
MR – you don’t always have to defend your mates when they’re really being dumb.
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