Company tax cuts versus personal income tax cuts

I know it is not a propitious time to discuss tax cuts, but I do side with Paul Keating that company tax cuts (with full dividend imputation) are essentially tax cuts for foreigners. While I have a lot of respect for Michael Potter, on this issue he is quite wrong (as is the BCA).

Rather than reducing the company tax rate, the government should reduce personal income tax rates. It is a long standing principle that the gap between the top personal income tax rate and the company tax rate should be narrowed, not widened.

The claim that Australia is suffering an investment drought as mentioned by Michael Potter in today’s AFR does not stack up. We continue to run a current account deficit, hence a capital account surplus. Any worthwhile project can obtain finance. Many poor projects cannot and should not obtain finance.

We are in the midst of a mindless debate on inequality, even though it has not widened as claimed by Bill Shorten. What matters mainly are that living standards rise over time –  North Korea is probably more equal conventionally measured but would be a terrible place to live.

Rather than giving tax cuts to foreigners with a company tax cut, the Government could have cut income tax rates providing a benefit to Australian workers. That would have helped reduce the potency of the fallacious inequality debate. Cutting the company tax rate at this stage simply adds fuel to that argument.

About Lucius Quinctius Cincinnatus

I'm a retired general who occasionally gets called back to save the republic before returning to my plough.
This entry was posted in Uncategorized. Bookmark the permalink.

45 Responses to Company tax cuts versus personal income tax cuts

  1. This is simplistic. Yes, for a taxpayer on a marginal income tax rate higher than the corporate tax rate who receives a franked dividend, the corporate rate doesn’t matter. Franking credits don’t go overseas, hence the claim about tax cuts for foreigners. But can you consider two further points: 1) what about tax payers whose marginal rate is lower than the corporate rate (eg super funds), and b) what is the effect on the return on investment for the owners of capital, whether foreign or not – is it better to invest in projects where the rate is lower or higher? What will that mean for investment in Australian producer goods, plant and equipment?

  2. Rabz

    It’s OK, toots, there won’t be any company tax cuts.

    Or any income tax cuts, either.

    There will however, be lots of tax increases and lovely new taxes such as death duties and CGT on family homes.

    Winning!

  3. Roger

    Rather than giving tax cuts to foreigners with a company tax cut, the Government could have cut income tax rates providing a benefit to Australian workers. That would have helped reduce the potency of the fallacious inequality debate. Cutting the company tax rate at this stage simply adds fuel to that argument.

    Why not both?

    That would necessitate cuts to the budget but it’s not as if there isn’t plenty of fat to trim.

    I’ll volunteer for the razor gang.

  4. Shy Ted

    Perhaps if governments repealed some black, green and red tape then Australian individuals and companies might invest in Australian projects, think Adani, Darwin port and who knows how many other businesses, likely thousands, or start their own businesses, then company tax cuts would be a tax cut to Australians, not foreigners. And I look around the country at the various political parties and think, “won’t happen in my lifetime”.

  5. Tel

    We continue to run a current account deficit, hence a capital account surplus.

    Yes, we are borrowing for the purpose of consumption, and we pretend it is “capital”.

    This process is strip-mining the lives of future Australians. They won’t pay you know, they will realize what has been done to them (I will explain it to them) and then they will say, Far Queue and default on the debt.

  6. Blair

    ” company tax cuts (with full dividend imputation) are essentially tax cuts for foreigners.”
    What demands do foreigners whose companies invest and operate in Australia place on Australia’s economic and welfare systems?
    Apart from utilising our legal and protection services, bugger all.

  7. Roger

    They won’t pay you know, they will realize what has been done to them (I will explain it to them) and then they will say, Far Queue and default on the debt.

    Their future:

    The Banana Republic of Venestralia.

  8. Nerblnob

    What Shy Ted said. It’s a wonder anyone invests in Australia at all. There’ll be fuckall economic activity left to tax the way things are doing.

  9. Pyrmonter

    LQC – which do you consider more important: the loosening of fiscal policy and the distributional benefit of reducing rates on low/middle income earners (many of whom already pay little income tax already); or the effect of changes in marginal rates on middle/high income earners – the wedge that distorts the price signals in wages? Can you fix both?

  10. Robber Baron

    Everything belongs to the government. We just get to pay for it.

  11. Diogenes

    LCQ.
    I half agree, there should be no gap, so my simplistic idea…

    BOTH federal income & company taxes rates should fall to 0%. The federal govt keeps the GST & sets it at a rate to pay for ONLY Border Protection(defence, customs including the TGA, immigration), and social security(ie enumerated powers under section 51) and pay off the debt over a nominated period of years. So no bickering about how much is “returned” to the states.

    The states then levy their own taxes to pay for health , education , infrastructure etc. If the state wants to set up its own medicare , fine, if not …, if they want to subsidise solar and not build coal, they will not be able to cost shift their decision to another state, if they want to build gold plated school halls fine. I will then up sticks and move to a state that matches my philosophy. Anything the states really really want the Feds to coordinate, like say ACARA, or Nurses & DRs registration they contribute equally to the cost.

    I want every bastard who looks at an invoice or docket to see what the federal government is costing them, and every time they look at their payslip how much the state is costing them.

  12. Empire

    I want every bastard who looks at an invoice or docket to see what the federal government is costing them, and every time they look at their payslip how much the state is costing them.

    And there is a sane tax policy is one sentence.

  13. Zyconoclast

    I want every bastard who looks at an invoice or docket to see what the federal government is costing them, and every time they look at their payslip how much the state is costing them.

    And there is a sane tax policy is one sentence.

    As long as the net tax vampires outnumber the net tax payers, it won’t matter what you put on payslips or invoices.

    Unless voting is limited to those who pay the taxes, it will only get worse.
    (Same for Locsl Councils. Only ratepayers get to vote)

  14. max

    Corporations don’t pay taxes; people do.
    Corporations are owned by shareholders: large pension funds, 401k plans, university and other endowments, and individual investors. The corporate income tax is just another government mandate that raises the cost of doing business—just like the minimum wage, unemployment taxes, the employer share of payroll taxes, health-insurance mandates, family-leave requirements, and government regulations. The corporate tax burden is borne by shareholders through lower dividends and share prices, passed along to consumers through higher prices, and paid by workers in companies in the form of lower wages.

    The corporate income tax is a double tax.
    The same income is taxed once at the corporate level as profit and then again at the individual level as income when it is distributed as dividends to shareholders. It is a double tax just like individuals having to pay an income tax and a payroll tax on the same income.

    The corporate income tax is a hidden tax.
    It is easy for liberals, progressives, and Democrats to persuade the typical American worker to support the corporate tax since it is a tax that he thinks he is not paying. But of course, he is paying it. Just like he is paying the federal tax on airline tickets and just like he is paying the federal and state excise taxes on gasoline even though these things don’t necessarily show up on his receipt.

    https://www.lewrockwell.com/2017/05/laurence-m-vance/makes-us-poorer/

  15. .

    The claim that Australia is suffering an investment drought as mentioned by Michael Potter in today’s AFR does not stack up. We continue to run a current account deficit, hence a capital account surplus. Any worthwhile project can obtain finance. Many poor projects cannot and should not obtain finance.

    Hey. Maybe personal income tax rates ought to be 100%, then no one can set up a company and become a foreigner copping sweet corporate income tax cuts, right?

    Your argument is as stupid as saying there are still murders, ergo neither life imprisonment or capital punishment have a deterrence effect. The effect is marginal and you should know this, or you have bullshitted to us your apparent level of competence.

  16. Hydra

    The company tax rate should be nil.

  17. Combine Dave

    .
    #2458016, posted on August 3, 2017 at 10:53 am
    The claim that Australia is suffering an investment drought as mentioned by Michael Potter in today’s AFR does not stack up. We continue to run a current account deficit, hence a capital account surplus. Any worthwhile project can obtain finance. Many poor projects cannot and should not obtain finance.

    Hey. Maybe personal income tax rates ought to be 100%, then no one can set up a company and become a foreigner copping sweet corporate income tax cuts, right?

    Your argument is as stupid as saying there are still murders, ergo neither life imprisonment or capital punishment have a deterrence effect. The effect is marginal and you should know this, or you have bullshitted to us your apparent level of competence.

    I have both an erection and a strong desire to vote LDP.

    Well done.

  18. max

    “but I do side with Paul Keating that company tax cuts (with full dividend imputation) are essentially tax cuts for foreigners.”

    Paul Keating is lying politicians :
    “The company tax rate fell under his watch from 49 per cent to 39 per cent in 1988, and again to 33 per cent in 1993.”

  19. OldOzzie

    Probably the same in Australia – for federal employees in Washington, D.C, substitute Federal Employees Canberra

    Government Employees Earn Almost Double The Average American


    There’s a reason government jobs are so sought after: The average government salary is nearly double the average American worker’s.

    The average government salary in 2016 was $83,072, according to a report on federal salaries from the Office of Personnel Management released in July.

    By comparison, the average wage index for the U.S. in 2015, the most recent available calculation, was $48,098, according to the Social Security Administration.

    Unsurprisingly, federal employees in Washington, D.C., and the surrounding metropolitan areas of Maryland and Virginia, where the managers and top-level agency executives work, had the highest average salaries.

    While the federal workforce is hardly representative of the entire U.S., the gap disparity between average salaries has been growing for some time. In 2001, the average government worker made 1.39 times what non-government employees made, but that ratio grew to 1.58 by the middle of 2016, according to BLS data compiled by Bloomberg News.

  20. max

    we do not live in the vacuum.

    if our competition reduce tax rate than we are going out of business if we do not do same.

    that is why decentralization is good for people — we can vote with our feet.

  21. .

    Swamp? Washington D.C. is a veritable supermassive black hole.

  22. max

    OldOzzie
    #2458086, posted on August 3, 2017 at 12:33 pm

    +10

    unfortunately true, we have 1,9 mill leeches in australia

  23. Rohan

    Nerblnob
    #2457921, posted on August 3, 2017 at 9:11 am
    What Shy Ted said. It’s a wonder anyone invests in Australia at all. There’ll be fuckall economic activity left to tax the way things are going.

    There’s sweet FA going on now. Transport companies are now begging for business. That’s always a sign that things aren’t good. But hey, SSM, windmills and other assorted lefty unicorns are the order of the day. You know, #importantstuff

    Tax cuts, reigning in government spending/debt, red tape and allowing business to grow and flourish? Not so much.

    Our Agile and Innovative Potential Greatness™ Centre-Marxist PM has seen to that.

  24. Rob MW

    Your argument is as stupid as saying there are still murders, ergo neither life imprisonment or capital punishment have a deterrence effect. The effect is marginal and you should know this, or you have bullshitted to us your apparent level of competence.

    Dot – the captain cannot multitask on anything let alone taxation opinion, it’s beyond his/its comprehension.

    I’m still scratching my head about this phara: “The claim that Australia is suffering an investment drought as mentioned by Michael Potter in today’s AFR does not stack up. We continue to run a current account deficit, hence a capital account surplus. Any worthwhile project can obtain finance. Many poor projects cannot and should not obtain finance.” I thought that a trading account might somehow, not sure how, be different to an investment account. I mean, the deficit the captain refers is capital (imports) that has flowed out of Australia and is accounted against capital flowing back in (exports) so the captain wants this scenario to now reflect foreign investment as an export. I’ll continue to scratch the head trying to figure the rationale out. It took me many years to figure out why, some many years ago, that accountants boosted company value by including an asset value of/to ‘Goodwill’ – FMD that brings back memories.

  25. Lucius Quinctius Cincinnatus

    Note that I never said we shouldn’t reduce the company tax rate. I said the prioruty should be on the income tax rates. When Keating reduced the company tax rate he reduced the top marginal tax rate by more thus narrowing the gap. As for a capital account surplus it means a net inward flow of capital. We do not have an investment strike in Australia and those who say so don’t understand economics 101

  26. Lucius Quinctius Cincinnatus

    Max your argument about countries competing is mercantilist. Countries have comparative advantages while companies compete. Again economics 101

  27. .

    Lucius Quinctius Cincinnatus
    #2458157, posted on August 3, 2017 at 1:40 pm
    Max your argument about countries competing is mercantilist. Countries have comparative advantages while companies compete. Again economics 101

    Countries compete for capital. Let’s say we’re more competitive than Venezuela, for the moment.

  28. Ray

    It is correct to suggest that company tax cuts favour offshore investors, since there are no company taxes for most domestic investors given that these are returned via franking credits on dividends paid. However, this only applies to the proportion of company profits in which dividends are paid, around 60% of the total. The remainder are taxed at the company tax rate. Of course, to the extent that retained earnings are used to invest in new plant and equipment, there will be a depreciation benefit accruing to lower taxes paid in the future, although this will not apply to investments in land or working capital, the latter being expensed which will reduce the tax bill but then generate further taxable cash flows.

    As a result, LQC is only partly correct. Offshore shareholders will gain the full benefit of any company tax cut, until the company tax rate falls below 20%, the non-resident dividend withholding tax rate. However, domestic shareholders will continue to gain a benefit from company tax cuts depending upon how the company in which they have invested spends any retained earnings.

    Thus, it is not unreasonable to expect that a company tax cut will spur investment, even though a cut in personal income taxes will likely have an greater impact on investment.

  29. .

    Lucius Quinctius Cincinnatus
    #2458154, posted on August 3, 2017 at 1:38 pm
    Note that I never said we shouldn’t reduce the company tax rate. I said the prioruty should be on the income tax rates. When Keating reduced the company tax rate he reduced the top marginal tax rate by more thus narrowing the gap. As for a capital account surplus it means a net inward flow of capital. We do not have an investment strike in Australia and those who say so don’t understand economics 101

    All forms of income ought to be treated equally and taxed at a much lower flat rate with a high tax-free threshold.

    Just because we still have investment doesn’t mean that it hasn’t decreased or it is maximised as potential investment and output (that the rate of growth of FDI hasn’t been reduced).

    We can never have enough capital, foreign and domestic. That raises wages and our standard of living.

  30. Norman Church

    The iron rule of politics is that personal tax cuts are only provided to those persons who pay little or no tax. Otherwise, the cuts are not ‘fair’.

  31. Infidel Tiger

    We will not see tax cuts in this country ever again.

  32. Infidel Tiger

    The only exception being, I expect womynz sanitary products to have the GST removed soon and for all politicians to wear a soiled pad for a day in solidarity.

  33. Ray

    As for LQC’s comments regarding the Current Account deficit and the Capital Account surplus, he gets this very wrong.

    A Current Account deficit does not lead to a Financial Account surplus, rather, it works the other way around. The driving factor is national savings.

    If we have a savings shortfall, we will then need to import capital, resulting in net financial flows, an appreciation in the currency making local production less competitive and so leading to a Current Account deficit. The rub is that a savings shortfall will decrease investment in the local market by making local production less profitable.

    Thus LQC is correct to suggest that good quality projects will attract capital, however, he fails to acknowledge the effect of other factors on the risk and potential profits from such projects. The existence of a national savings shortfall is one factor which reduces the profitability of local projects and so reduces the number of bankable projects.

    Of course there are many factors which impact the risk and rewards inherent in new projects. Company taxes, regulations, green tape, our centralized industrial relations system and the budget deficit all play their part in ensuring that we have fewer potential projects which can grow this economy.

    The point here is that neither company taxes nor personal income taxes are sufficient to reinvigorate the Australian economy. We need to do both but we also need to so much more than this. Governments of both persuasions have done immeasurable harm to the welfare of all Australians giving us a long list of issues which need to be addressed.

  34. Terry

    Otherwise, the cuts are not ‘fair’.

    What could be fairer than a single, flat percentage?

    But then “fair” is just another Leftard euphemism for “ENVY”.

    I want to be able to vote for the democratic right to steal your stuff – seems “fair”.

    We need to stop using the term “tax cut” – it implies that all of the wealth belongs to the state and through its generosity, some of that wealth is distributed back to (grateful) recipients.

    That’s 100% arse-about.

    We need to talk about taxes levied and whether THEY are “FAIR”.

    Why should someone on the average annual full-time wage (AUD$82,800 :Nov ’16) pay $20,113 in tax (24.3%)…

    …while someone on twice the average annual full-time wage (AUD$165,600) pay $52,216 (31.5%) and 2.6 times the tax of the average.

    Furthermore. Why is someone earning only 2.5 times the average full-time wage ($207,000) in the TOP tax bracket and paying $70,522 in tax (34% – over a THIRD) and 3.5 times the tax of the average.

    The basic responsibilities of government require nothing like this kind of taxation (Read: THEFT).

    A dramatic cut in spending should be closely followed by the re-setting of tax rates to a flat 20% (a fifth is MORE than enough to entrust to governments to spend on your behalf).

    The company rate should be reduced to match that flat rate of personal income taxation.

    After that, it should be the ambition of government to get that down to 15%.

    ‘Tax and Spend’ is not a strategy for ongoing prosperity.

  35. Tim Neilson

    Thus LQC is correct to suggest that good quality projects will attract capital, however, he fails to acknowledge the effect of other factors on the risk and potential profits from such projects. The existence of a national savings shortfall is one factor which reduces the profitability of local projects and so reduces the number of bankable projects.

    Yes, in principle.

    But what’s otherwise a “good” project can be taxed out of contention (the same way that other factors, as you mention, can cause it to be canned).

    Whether we’re at that stage yet I don’t know. But I’m sure you’d agree that the general concept behind Art Laffer’s theory can’t be wished away, no matter how much our governments want to.

  36. Norman Church

    Terry – #2458262, posted on August 3, 2017 at 3:28 pm

    Amen to all that!

  37. Indigo

    As a totally self funded retiree, dividend imputations keeps me of the taxpayer paid pension. Every night I go down on my knees and say a thank you for Peter Costello.

  38. Rococo Liberal

    I hate to break it to you but it was actually the Hawke Government that introduced dividend imputation. It was the rade off for introducing the ghastly CGT and FBT.

  39. Habib

    Why not reduce or repeal all tax rates? Piece of piss if government stops throwing around money like a bogan keno winner on meth.

  40. Dr Faustus

    ‘Tax and Spend’ is not a strategy for ongoing prosperity.

    Quite true: but it is a strategy for sustainable government careers.

  41. max

    Sorry, maybe I was not clear in my previous post ( nothing to do with mercantilism ).

    Under hypothetical scenario where have choice to start business in

    State A — 50% corporate tax
    or
    State B — 10% corporate tax

    all other things being equal

    he will chose State B.

    That is why we should fight for taxes to be levied on local level ( council, canton, County. )
    That way we can vote with our feet.

    Why Tax Competition Is a Good Thing
    The benefits of tax competition does not depend on the existence of a single uniform tax rate but, on the contrary, on diversity of the tax regimes.

    https://mises.org/blog/eu-vs-apple-vs-ireland-why-tax-competition-good-thing

    Brexit could open new perspectives for the old continent, not by bringing more protectionism but by bringing more competition between governments.

    European political fragmentation leads toward a jurisdictional, fiscal, and regulatory pluralism which is itself useful in opposing laws that are especially damaging to commerce. In the presence of burdensome laws, citizens may be prompted to “vote with their feet” by taking their capital and industriousness to a place where individual rights are better protected. This is a vital mechanism in order to increase general prosperity. Many economists and historians have shown institutional competition was one of the key factors of Europe’s accumulation of wealth.

    https://mises.org/blog/how-brexit-could-help-all-europe

    If the junta of high-tax governments has its way, not only will there be no place left to run, but by eliminating what tax havens offer, these governments will have eliminated tax competition, and with it the imperative to downsize their fiefdoms.

    https://mises.org/library/war-tax-havens

    Is Burger King an Economic Patriot?

    decisions by U.S. companies to buy foreign firms to move their headquarters abroad and renounce their U.S. citizenship — to evade the U.S. corporate tax rate of 35 percent.

    https://www.lewrockwell.com/2014/09/patrick-j-buchanan/economic-patriotism/

  42. max

    Sorry, maybe I was not clear in my previous post ( nothing to do with mercantilism ).

    Under hypothetical scenario where have choice to start business in

    State A — 50% corporate tax
    or
    State B — 10% corporate tax

    all other things being equal

    he will chose State B.

    That is why we should fight for taxes to be levied on local level ( council, canton, County. )
    That way we can vote with our feet.

    Why Tax Competition Is a Good Thing
    The benefits of tax competition does not depend on the existence of a single uniform tax rate but, on the contrary, on diversity of the tax regimes.

    https://mises.org/blog/eu-vs-apple-vs-ireland-why-tax-competition-good-thing

  43. Paul Farmer

    One should not infer that just because we have a net capital inflow now that is funding the current account deficit that ergo sum we are not at risk of losing investment by foreigners in the future. That is a real risk to be considered in determing where to put the corporate rate. The BOP’s reflects past transactions. What is relevant in setting the corporate tax rate is how it will impact future investment transactions, the present position of the Capital Account is therefore irrelevant to that assessment.

    The world particularly if the USA lowers their corporate rates which is a strong possibility is going to create a flow on effect with a number of jurisdictions moving lower. If most advanced economies are sitting on 20 % or lower and here we are still sitting on 30 % , you have to have rocks in your head to think that wont affect investment decisions by foreigners in the future, both by companies considering direct investment and by mutual funds type investors wishing to buy our listed stocks . Going the other way however to say there will be a capital strike is clearly exaggerating but there will certainly be likely a material effect over a longer term if our rates move way out of alignment with global rates. Those who do invest here will only do so if they perceive their after tax return as high enough given their risk. If we are 10 % higher on an after tax basis that is certainly going to deter some foreigners investors.

    The BOP will still find ways to balance itself, as after all its an accounting identity only. Its likely to be through a lower aussie dollar which will assist the current account side hence requiring less capital inflows to offset.

    The notion to that domestic Australians have little to gain by lowering the corporate rate is also a bit of simplistic nonsense. I have spent my whole life in Corporate australia working in finance and when we model projects NPV to decide on investment projects we never model it on before tax returns, it is also the after tax return relative to the risk. A lower corporate rate will help push more projects over the line into investments which drives job creation and likely higher wages for employees to. A lower corporate rate means higher dividend payout ratios for companies too which given how many retirees now depend on corporate dividends for a retirement or part retirement income , given that interest rates are so abysmally low, few people no longer park their savings in fixed income deposits, so a lower corporate rate will help many Australians through various means. Keating’s statement that only foreigners benefit from a corporate tax fall was a throw away line for an easy headline to make effect but when you analyze it , it doesn’t stack up.

Comments are closed.