Incidence of company tax

Warren Mundine in the AFR this morning:

In its fight against company tax cuts, Labor peddles the myth that company tax cuts are a windfall for big businesses and their shareholders, this week even launching ads suggesting Malcolm Turnbull supports company tax cuts because he’ll personally benefit as an investor.

It’s a myth easily debunked. Think about it. What exactly can a company do with the extra money retained from paying less tax? It can only spend profits in two ways: paying dividends to shareholders or spending more on its operations.

Dividends are subject to tax, including withholding tax for foreign shareholders. Suggesting Turnbull or any other investor will get a windfall is a blatant lie.

In fact, many shareholders will pay more tax to make up the greater difference between the company tax rate and their own tax rate. That’s how dividend imputation works, as Labor well knows.

Alternatively, the company can spend more on things like technology, plant and equipment, funding research and development, expanding its sales force or opening new shopfronts or branches. In other words, more money paid in wages to workers and buying goods and services from suppliers.

All of that spending is also taxed. Workers pay income tax. GST is collected on goods and services. Suppliers pay company tax or income tax themselves.

Lower company tax simply allows a business to use more of its money on something productive before the money is collected by government.

Simply magnificent explanation.

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15 Responses to Incidence of company tax

  1. H B Bear

    Lower company tax simply allows a business to use more of its money on something productive before the money is collected and wasted by government.

  2. Genghis

    Would be a great story on how Warren got himself into being the President of the Labor Party. Maybe even a book but it appears his experience put him off socialism forever. The book should be compulsive reading, if it is ever written.

  3. Snoopy

    Simply magnificent explanation.

    Given the way the ABC has been working hand in glove with Fairfax of late I expect Mundine’s explanation to be all over the ABC.

  4. Sinclair Davidson

    To be fair – there does appear to be a separation between the AFR and The Age and SMH. At the expense of starting an argument and derailing the thread, the AFR remains a good newspaper. The Age and SMH not so much.

  5. kc

    Thank god someone finally said it. Companies are not a person. Banks are not a person. Profits distributed, after company tax (franked dividends) is still taxed at the margin tax rate of the person who gets the dividend. Why has this been so hard for Turnbull, Corman and Morrison to explain. The politics of envy could be so easily shut down if any of these morons had an once of debating skills.

  6. jupes

    It can only spend profits in two ways: paying dividends to shareholders or spending more on its operations.

    No. There is a third way. They can increase the salary and bonuses of the executives and board.

    Knowing a few lefties, this is what they are obsessed with.

  7. Snoopy

    The AFR is yet to recover from losing Laura Tingle.

  8. RobK

    So many are focused on what to spend taxes on, so few have any idea about sustaining prosperity. They are not the same thing.

  9. JC

    This is not entirely correct, but certainly in the right path.

    It’s a myth easily debunked. Think about it. What exactly can a company do with the extra money retained from paying less tax? It can only spend profits in two ways: paying dividends to shareholders or spending more on its operations.

    They can
    1. Pay dividends to the owners (shareholders)
    2. Return Capital to the shareholders
    3. Buy back capital
    4.Retain some of the earnings
    5. Spend money on operations.

    Nice piece though.

  10. JC

    whoops

    3, should be buy back stock.

  11. Tel

    JC: 1, 2 & 3 are all variations on the same thing. Might be significant from a tax perspective but not from an economic perspective.

    Although the CEO is an employee and the guys pushing brooms around the factory floor are also employees just the same way (from an accounting perspective all are operations costs), to the ALP these things are NOT the same, because the CEO won’t join a union and having a higher salary makes you “privileged”.

    I put it forward that lower company taxes might also encourage some companies to lower prices and become a boon to the customers, or they might pay more to their suppliers (we still believe in economic competition). The windfall will move to the least elastic part of the supply chain.

  12. Tel

    All of that spending is also taxed. Workers pay income tax. GST is collected on goods and services. Suppliers pay company tax or income tax themselves.

    Yeah, it’s going to get picked up somewhere along the line. I think it will come out a wash on average.

    There could well be some redistribution in it, hard to say where that would go.

  13. Isn’t Turnbull copying Trump in giving tax cut to corporations and the wealthy? Trickle-down economics, or “trickle-down theory,” states that tax breaks and benefits for corporations and the wealthy will trickle down to everyone else. I don’t think Australians are fooled into thinking that anything good will trickle down to them.

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