6 February 2017
By David Hetherington
In this brave new world of “alternative facts”, reasoned argument just doesn’t cut it anymore. While the phrase originates with the Trump administration, the tactic has been gaining traction in Australia too.
Burqas make us less safe, negative gearing has no effect on housing affordability, citizens expect politicians to use public funds to attend sporting events. No evidence needed – assert it and hey presto, it’s true.
But the return last week of a perennial political assertion offers a reminder of the value unpacking these claims and examining their moving parts.
In a speech in London, treasurer Scott Morrison warned that Australia would be stranded unless it moved quickly to cut company taxes. Malcolm Turnbull doubled down on the argument in his speech at the National Press Club on Wednesday. Their pitches echo ad nauseum calls by the BCA and a relentless media campaign by The Australianand the AFR.
Their argument is that Australia’s competitiveness will decline if we don’t cut company tax to match selected low-tax countries. By “competitiveness”, they mean that investors will choose to put their capital in other countries in preference to Australia because they pay less tax there.
But pause to consider a few (non-alternative) facts.
First, Australian firms are not going to dramatically shift their investment elsewhere.
All firms have a choice of where to invest their capital, and Australian firms invest the vast majority of theirs, more than 83%, here at home. In 2015, Australian firms invested $109bn in private capital expenditure locally, compared with $22bn overseas.
This is exactly what you’d expect. For most Australian firms, investing in another country to take advantage of lower taxes makes no sense. Their operations, customers and shareholders are here. This includes all our big oligopolies – the big four banks, Coles and Woolworths, Qantas and Virgin. They are not going to suddenly shift investment overseas because the company tax rate stays constant.
The big miners are in a different category because they do have a choice of global projects in which to invest. However the tax rate is nowhere near as important as the quality and cost of the geological asset, and happily Australia has outstanding low-cost assets.
In fact, large Australian companies don’t have a terrific track record of investing overseas. In recent months, ANZ, NAB and Telstra have all exited or written down investments in offshore companies. It turns out you need more than a lower tax rate to make foreign investment work.
Then there’s entire small-to-medium enterprise sector for whom making investment decisions based on tax-shopping is laughable. Try explaining it to your local hairdresser, landscaper or restauranteur.
The second key fact is that foreign firms already invest extensively in Australia at our current tax rates.
While we invested $22bn offshore in 2015, global companies directly invested $30bn here. (This doesn’t include portfolio investments in shares and bonds, or the much-hyped Chinese investment in our real estate.) Australia has always been a net importer of capital, and has little difficulty attracting it – we’ve got wealthy consumers, a highly educated workforce, a strong legal system and a great lifestyle. This is the reason 45% of our stock market is held by foreign investors.
And as recent research from the Australia Institute has found, 97% of applications to Australia’s Foreign Investment Review Board come from countries with lowertax rates, pouring water on the idea that higher rates discourage investment.
Our inbound foreign investment has fallen recently but this is not due to our tax rate. It’s because the enormous investment cycle in mining has ended, and because firms around the world are holding onto cash due to global economic uncertainty.
Lastly, the killer fact. A corporate tax cut does not change the financial position of a single Australian investor. Thanks to our system of dividend imputation, cutting the company tax rate would mean that Australian investors pay more personal income tax because they receive less of the franking credits that are used to offset personal tax.
So our hairdresser won’t see a dollar more from a company tax cut. Nor will an individual shareholder or a superannuation account holder. Sadly for Morrison’s assertions, their investment decisions won’t change one bit. No, the only people who benefit from an Australian company tax cut are overseas investors. And as we’ve seen, they already invest happily in Australia.
So why on earth, when we’re struggling with a growing deficit and offshore investors are already pumping money into Australia, would we enact a tax cut which lowers government revenue, benefits not a single Australian, and favours only global corporations?
You’ll have to ask Scott Morrison.
