The government has finally lost its bid to give big companies tax cuts, after the Senate rejected a desperate compromise that would have excluded the big banks.
With the Liberals in free fall over the leadership crisis and Peter Dutton admitting he is shaping up for another tilt at Malcolm Turnbull, the Senate defeat of the tax cuts, by 36-30, although long expected, was yet another blow to a reeling government.
Earlier Dutton, on 3AW, said of his campaign for the prime ministership: “I’m speaking to colleagues, I’m not going to beat around the bush with that.”
“If I believe that a majority of colleagues support me then I would consider my position”.
Dutton said he did not think the government should persist with the business tax cuts to the election.
“I would support that money being applied either to households or to a tax cut for small or micro businesses to allow them to grow”.
His stand on the big business tax cuts is part of the highly populist policy pitch he is putting forward, which includes removing the GST from electricity bills and having a royal commission into power companies.
“One of the things that we could do straight away in this next billing cycle is take the GST off electricity bills for families. It would be an automatic reduction of 10% off electricity bills,” he said.
“We could set up a royal commission into the electricity companies and into the fuel companies. I think Australian consumers for way too long have been paying way too much for fuel and for electricity and something just isn’t right with these companies.
“Like we’ve done with the banks, I think the royal commission has the ability to get to the bottom of what is fundamentally wrong in the system, and what could help ease some of that pressure on families and potentially small businesses.”
The Senate defeat ends months of wrangling by Senate leader Mathias Cormann to get the tax measure through. Those against, apart from Labor and the Greens, were crossbenchers from One Nation and Centre Alliance, as well as Derryn Hinch and Tim Storer.
The government has already legislated phased-in cuts for companies with turnovers up to $50 million annually. The defeated legislation would have phased down the corporate rate for the big companies from 30% to 25% by 2026-27.
The proposal to exclude the banks was put by the government as a last roll of the dice. The debate was strung out this week as Cormann tried to swing the critical crossbench votes.
Cormann told the Senate the government understood the politics in relation to the banks, but as for other big companies, it was critical for Australia to have a competitive tax rate. Hinch unsuccessfully promoted a proposal to impose a ceiling of $500 million turnover.
During Wednesday morning’s debate, Labor made merry with the Liberal leadership chaos.
Labor frontbencher Doug Cameron said “The question is when is Senator Cormann going to join his great mate, Peter Dutton? When is he going to join him and when is the end of this government going to actually happen? I hear that it’s on again.” On Tuesday, Cormann declared his backing for Malcolm Turnbull.
The Business Council of Australia said: “The Senate’s failure to support a modest company tax cut over the next decade leaves Australia with the third highest company tax rate in the developed world, and at risk of having the highest.
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“It is extraordinary that Senators representing states where business investment is so vital have walked away from this for pure short-term political reasons.”
Opposition leader Bill Shorten has backed down on his controversial declaration on Labor’s company tax policy, announcing a compromise that would allow firms with turnovers under $50 million to keep the tax cut that will be in place at the election.
This would be a 27.5% rate. But companies would not get the rest of the already legislated cut, which eventually takes their tax down to 25% by 2026-27.
The compromise follows a fierce backlash from business and an outcry from some of Shorten’s senior colleagues, after he declared an ALP government would repeal tax cuts for firms with turnovers between $10 million and $50 million.
While that position had support in the opposition’s expenditure review committee, it had not been taken to shadow cabinet.
The shadow cabinet endorsed the new position on Friday morning.
Shorten told a news conference that it had become clear in consultations with business and colleagues “that any proposition to change already implemented tax rates … was creating great uncertainty.”
“I have listened to all of the debate, spoken to colleagues, spoken to business. I now accept that simply stopping at $10 million would have created more confusion and uncertainty and it was not the main game,” he said.
Asked whether he had got things wrong, Shorten said: “You can play all the word games you want, but let me be very, very clear. We have changed our position, we have amended our position because politicians who do not listen, politicians who just simply want to stick on one course of action regardless of all the facts, I do not think that helps anyone.”
Shorten said that as well, on the latest figures from the Parliamentary Budget Office (PBO), “we have also found that the cost of this amendment on company tax cuts is not as great as we thought.”
Shadow treasurer Chris Bowen told the news conference that the position Shorten put on Tuesday reflected what Labor’s expenditure review committee thought at that time could be afforded – before the updated PBO figures.
Compared with the government’s legislated cuts, the Labor position saves $2 billion over the forward estimates and $62 billion over a decade.
An ALP government would have to get its repeal legislation through the Senate, which could be a challenge.
Business remained dissatisfied with Labor.
Business Council chief executive Jennifer Westacott said the decision “has created confusion and will hurt business confidence”.
Labor had “failed to properly listen to the business community’s call to reverse its announcement earlier this week to repeal the tax cuts for business with a turnover of under $50 million. Freezing the threshold at 27.5% for those businesses is actually a tax increase on the 25% rate that has been passed by the parliament”.
The Australian Industry Group welcomed the Labor change but said it regretted Labor remained uncommitted to taking the rate to 25%.
The group’s chief executive Innes Willox said: “We look forward to further discussions with the opposition on tax policy with the aim of a bipartisan commitment to lowering Australia’s corporate tax rate for all businesses to a more internationally competitive rate of 25 per cent over the medium term.”
Finance Minister Mathias Cormann tweeted: “Bill Shorten can’t even perform a backflip properly. Turns out he is still pushing for higher taxes on small and medium sized business putting jobs right across Australia at risk.”
Treasurer Scott Morrison said Shorten “has shown a complete lack of sensitivity to what our economy requires to ensure that people have their jobs and their wages and can plan for their future with confidence.”
The government has pulled its legislation for tax cuts for big businesses – for the second time this year – after its last minute bid to get the Senate crossbench numbers failed.
Announcing the retreat, Finance Minister Mathias Cormann, who had been running the negotiations, reaffirmed that the government remained committed to the cuts, and cast the July 28 byelections as a referendum on them.
Cormann was unable to win Pauline Hanson’s two votes or the two senators from the Centre Alliance.
After flip-flops and with the byelection in Longman at the forefront of her mind, Hanson stuck with her rejection of the measure. The Centre Alliance’s opposition was reinforced by the fact that its lower house member, Rebekha Sharkie, is fighting for survival in the Mayo byelection.
The government had flagged that it intended to press the matter to a vote this week but then decided it did not want to be rebuffed on the floor or parliament.
Cormann told a news conference: “We
need more time to make our argument to our colleagues on the
Senate crossbench – and we, of course, will continue to make our argument in the Australian community.”
“The government remains fully committed to these business tax cuts for all businesses because it is the right thing to do for working
families around Australia.”
This is the second blow on the tax front for the business community this week.
On Tuesday, in what’s been labelled a “captain’s call”, Opposition Leader Bill Shorten announced a Labor government would repeal legislated tax cuts for businesses with turnovers between $2 million and $10 million. Business has reacted angrily to the repeal plan.
The ALP is still considering its position for those with turnovers from $2 million to $10 million. It is under pressure to clarify its policy quickly.
Cormann said the byelections “will
be a referendum on who has the better plan for a stronger economy and more jobs”.
In a reference to speculation about the Labor leadership in the event of bad byelection results, Cormann said, “After the byelections, who knows? We might
have a more business-friendly Labor leader. All sorts of things could
be different on the other side of the byelections.”
He said his message to the people of Longman and Braddon was that they “do have the opportunity to send Bill Shorten and Labor a message. If they don’t like Bill Shorten’s higher taxes on business, on hardworking Australians, on retirees, on home owners, on everyone who moves, then vote against Labor, put Labor last.”
Cormann also targeted One Nation voters. He pointed to polling showing two thirds of One Nation voters in Longman supported lower business tax.
“I hope that the fact that One Nation voters increasingly appear to be coming on board with our plan for lower business taxes will, over time, help to persuade Senator Hanson this is the right thing to do.”
Bill Shorten has said a Labor government would repeal already-legislated tax cuts for companies with an annual turnover between A$10 million and $50 million, but left its position up in the air for those between $2 million-$10 million.
The decision, announced in response to questions at a news conference on Tuesday, does not appear to have gone through shadow cabinet. Nor did Shorten mention it when he addressed caucus on Tuesday morning.
It opened the opposition leader to immediate attack from the government and business.
Finance Minister Mathias Cormann said it was Shorten’s “captain’s call”.
Treasurer Scott Morrison said there were 20,000 businesses between $10-50 million turnover, with an average of 75 employees in those businesses.
“This is terrible news for 1.5 million Australians who work in those businesses that will have to face higher taxes under Labor if Labor is elected,” Morrison said. Shorten had turned former leader Mark Latham’s “ladder of opportunity” into “the snake of envy”, Morrison said.
The Australian Chamber of Commerce and Industry CEO, James Pearson said Labor had sent a “very bad signal to business today”.
The opposition has had a long-standing policy of leaving the cuts in place for the smallest businesses – with turnovers less than $2 million. But by failing to clarify its position for companies up to $10 million, Shorten has left uncertainty for many smallish businesses.
A spokesperson for Shorten said: “We’ve never supported these tax cuts for big businesses – we voted against them and we haven’t changed our position.
“We’ve always supported tax cuts for small businesses.
“As Bill said, we’re considering a threshold of $2 million or $10 million turnover. That will be decided by the shadow cabinet, in the normal way.”
Shorten’s announcement comes days after the speech by frontbencher Anthony Albanese in which he advocated the Labor strike a better relationship with business. The speech was seen as Albanese differentiating himself from Shorten on a number of fronts and positioning on leadership ahead of the Super Saturday byelections.
Asked about the decision apparently not having gone to shadow cabinet, ALP sources argued it had been generally known that a Labor government would not leave in place company tax cuts above the $10 million threshold.
But shadow treasurer, Chris Bowen, asked in May how long Labor was going to wait to give certainty to middle-level companies, said for companies above $2 million turnover “it is right and proper that we take some time to carefully work that through. We will be announcing our position, which will be crystal clear, not only to the voters but to the businesses of Australia,” Bowen said.
Labor earlier committed to repealing the tax cuts for big business, now before the Senate, in the event the government manages to legislate them. There is still no indication it can do so.
Whether a Labor government could get any repeals through would depend on the attitude of the Senate of the day.
Shorten’s announcement also comes as he faces criticism over Labor’s controversial advertisement, running in the byelections, that targets Malcolm Turnbull’s personal wealth and how he would benefit from the tax cuts for large companies.
The opposition is seeking to turn the battle over company tax onto Malcolm Turnbull’s personal wealth, with an attack advertisement declaring the Prime Minister stands to profit if the cuts for big business are passed.
The advertisement, to be used this week in campaigning for the Super Saturday July 28 byelections, says Turnbull “has millions invested in funds which hold shares in dozens of big businesses that would benefit from the tax cuts.”
The inflammatory ad runs as the government is making a last ditch effort against the odds to gather Senate support for the company tax legislation, due to be voted on this week. It also comes after Labor frontbencher Anthony Albanese on Friday distanced himself from Bill Shorten’s assaults on the top end of town.
The advertisement says: “Why is former banker Malcolm Turnbull so keen to give big business a tax cut instead of properly funding our schools and hospitals? Who exactly is he looking after? Malcolm Turnbull – is he just for the top end of town?”.
Labor also issued details of Turnbull’s investments, saying his statement of interests “shows that, through at least 15 of his 39 managed funds, he invests in 18 businesses that have a turnover of more than $50 million and an additional 14 businesses that have a turnover of more than $1 billion per year. Several of these funds have a minimum investment of $1 million.”
The tax cuts for big business are directed to companies with a turnover above $50 million annually.
ReachTEL polling in the Queensland seat of Longman done last Thursday, commissioned by the progressive think tank The Australian Institute and released on Sunday, has the Labor and Liberal National Party candidates 50-50 in the two-party vote.
The ALP’s Susan Lamb is fighting to regain the seat after resigning in the citizenship crisis. Labor’s primary vote was 39.1% and the LNP was polling 34.9%. One Nation was on 14.7%.
In Mayo, the other seat polled, the Centre Alliance’s Rebekha Sharkie, who also resigned over her citizenship, is leading the Liberals’ Georgina Downer 62-38%, widening her margin from her 58-42% lead in earlier polls.
Nationally, a Fairfax Ipsos poll, published in Fairfax Media on Monday, shows Labor leading the Coalition 53%-47% on the two-party vote. Turnbull has a 51%-33% advantage over Shorten as preferred prime minister.
In Longman, only a third of voters supported cutting company tax for large businesses; in Mayo just one quarter did so.
The government has flagged it will put the legislation to the Senate this week – the last before the winter recess – even if it is headed to defeat.
Several crossbenchers are opposed to the cuts, including Pauline Hanson and the Centre Alliance senators. The government has reiterated that it won’t split the bill to have a lower threshold that would exclude the banks.
Turnbull said on Sunday that Australia’s 30% rate for larger companies was the second highest in the OECD. Only Portugal had a somewhat higher rate.
Asked whether the government would walk away from the measure if it failed to get it through this week, Turnbull said: “We are committed to this reform”.
Friday’s Albanese speech has handed ammunition to the government. The broad-ranging address was seen as Albanese positioning himself in the event of Shorten doing badly at the byelections.
On relations with business, Albanese said: “Labor doesn’t have to agree with business on issues such as company tax rates, but we do have to engage constructively with business large and small.”
Questioned on Sunday, Shorten said his office got the speech before delivery and “there was nothing in that speech which caused me any offence at all”. He and Albanese had had “an amicable chat” since the speech.
“Let me make very clear for the record my views on big business. I will work with big business – I just won’t work for big business. I’m not anti big business – I’m just pro worker, I’m pro small business, I’m pro farmer, I’m pro pensioner,” Shorten said.
“It’s just all about priorities, we just happen to believe in the fair go for working and middle class people – Mr Turnbull on the other hand, he just looks after the top end of town and his other mates.”
A nationwide poll of nearly 3000 people commissioned by the Committee for Economic Development of Australia (CEDA), published on Monday in a report “Community pulse 2018: the economic disconnect” found that a majority of people don’t feel they have benefitted personally or don’t know if they have gained from Australia’s sustained economic growth.
It also found nearly eight in ten people believe the gap between the richest and poorest Australians is not acceptable.
Releasing the results, CEDA chief executive Melinda Cilento said: “Only 5% of Australians reported having personally gained a lot from our record run of growth, while 74% felt larger corporations and senior executives have gained a lot.
“A decade of stagnant incomes and cost of living pressures in areas like health and electricity are contributing to this feeling but waning trust in business and politics are also likely factors,” Cilento said.
The government will put both its company tax legislation and its income tax package to the Senate before parliament rises in late June, Finance Minister Mathias Cormann has confirmed.
Cormann also sought to scotch suggestions that the tax cuts for big businesses might be dropped if they were defeated then, saying “we are totally committed to the reform”.
He told reporters on Monday the corporate tax cuts were “even more important and more urgent now” than when the government took its package to the election as its central policy in 2016.
Within Coalition ranks there are doubts about persisting with the company tax measure if it can’t be legislated. The chances of the legislation passing the Senate plummeted last week when Pauline Hanson went back on her commitment to back it. But on Monday she appeared to be sounding a little less adamantly opposed, and invited people to contact her office with their views.
With three Senate votes Hanson has a veto.
Cormann committed the government to take the plan to the Super Saturday July 28 byelections if it was defeated in parliament.
He again ruled out a compromise that set a $500 million annual turnover threshold, which would give the package a greater chance of success. That would exclude the highly unpopular banks, as well as other big companies, from the cut.
Cormann said such a threshold “would be a barrier to growth. If you put an artificial ceiling on the growth that a business can aim for by essentially providing a disincentive to further growth beyond that threshold, you are putting a brake on jobs growth”.
The government has already legislated for tax cuts for firms of up to $50 million turnover. That limit was a deal with Senate crossbenchers.
The company tax cuts as well as the competing government and opposition income tax packages are set to be core battlegrounds in the byelections.
The government is also holding firm on not dividing up its three-stage income tax legislation. “We will not split the package”, Cormann said.
“Bill Shorten has to make a decision whether he wants to stand in the way of personal income tax relief for low and middle income earners.
“He has to make a decision whether his anti-aspiration, politics of envy vendetta is more important to him than providing cost-of-living pressure relief to low and middle income earners.”
Stage three of the government’s income tax package is the most controversial part because it flattens the tax scale. The benefits for low and middle incomes earners are in stage one, which the opposition supports. Labor, while highly critical of the third stage, has not said what it would do in the Senate if the government refuses to have at least that stage split off.
The government this week will continue talking with crossbenchers over the two tax packages.
Campaigning in Braddon, one of the byelection seats, Shorten said Malcolm Turnbull’s “corporate tax cuts are dead, buried and cremated – he is just too silly and arrogant to realise that.”
“‘Every extra dollar that goes to the Commonwealth Bank, or Westpac or ANZ or NAB, is a dollar less we have got in our in our kids’ schools, it’s a dollar less we’ve got to help the pensioners with their power bills, it’s a dollar less to help people when they are sick,” the opposition leader said.
Newspoll, published in Monday’s Australian, asked people whether the proposed changes to company tax rates should come into effect as soon as possible, in stages over the next 10 years, or not at all. More than a third (36%) said as soon as possible, 27% said in stages and 29% said not at all.
The poll had Labor back with a 52-48% two-party lead, compared with 51-49% in the last two polls.
It also saw Anthony Albanese heading Shorten as better Labor leader, 26% to 23%. Tanya Plibersek was also on 23%. The prospect of the byelection has stirred some leadership muttering in the ALP.
This week’s Newspoll, conducted May 24-27 from a sample of 1,590, gave Labor a 52-48 lead, a one-point gain since last fortnight. Primary votes were 38% Coalition (down one), 38% Labor (steady), 9% Greens (steady) and 8% One Nation (up two).
This is Malcolm Turnbull’s 33rd consecutive Newspoll loss as PM, three more than Tony Abbott. While Turnbull’s last two losses were both by a narrow 51-49 margin, Labor extended its lead in this poll.
The total vote for Labor and the Greens was steady at 47%, while the total vote for the Coalition and One Nation was up one to 46%. One Nation’s two-point gain is probably due to its reversal on the company tax cuts.
By 49-39, voters were dissatisfied with Turnbull’s performance (50-39 last fortnight). Turnbull’s net approval of -10 is a new high for this term. Bill Shorten’s net approval was -21, up one point. Turnbull led Shorten by 47-30 as better PM (46-32 last fortnight); this is Turnbull’s best better PM lead since September 2017.
26% (up three since early April) preferred Anthony Albanese as Labor leader, with 23% for both Shorten (down one) and Tanya Plibersek (steady). Albanese is benefiting from stronger support from Coalition and One Nation voters, who are unlikely to vote Labor. He is in third place with Labor and Greens voters.
By 39-37, voters thought Shorten and Labor would be better at maintaining energy supply and keeping power prices lower than Turnbull and the Coalition.
Last week there was a parliamentary sitting. The Coalition tends to do better when Parliament is not sitting. During parliamentary sittings, there is more focus on the Coalition’s policies, and these policies have been attacked by Labor.
In previous cases where Turnbull’s ratings have spiked, they have fallen back quickly. This time, Turnbull’s net approval increased by one point following a post-budget spike. If these ratings are sustained, they are likely to assist the Coalition.
On May 16, the ABS reported that wages grew at just a 0.5% pace in the March quarter, and 2.1% in the year to March. As I said in my first Newspoll article this year, wage growth is likely to be crucial at the next election.
Newspoll’s skewed company tax cuts question
The full wording of Newspoll’s company tax cut question can be seen here. Rather than asking a simple support/oppose type question, Newspoll asked whether voters wanted the company tax cuts as soon as possible, over the next ten years, or not at all. This is a skewed question, as two of the possible responses were favourable to the tax cuts, with only one unfavourable.
The question also suggested a “when”, not an “if”. That is, voters were asked when the tax cuts should be introduced, rather than if they are a good idea.
In addition, the current debate is not over whether “all” Australian businesses receive a tax cut. Companies with a turnover of up to $50 million received a tax cut in March 2017. The debate is whether larger companies should receive the tax cut. The only pollster that has asked explicitly about big companies, ReachTEL in late March, showed voters were opposed by an emphatic 56-29.
In last week’s Essential, not providing company tax cuts for large business was the most popular option when voters were asked to assess measures to cut government spending (60-22 support).
According to this Newspoll question, 36% wanted company tax cuts as soon as possible, 27% over the next ten years, and 29% not at all. The Australian’s Simon Benson claimed that the 63% who supported the company tax cuts is higher than for the same-sex marriage plebiscite (61.6%) – a very dubious claim.
Essential: 51-49 to Labor
Last week’s Essential poll, conducted May 17-20 from a sample of 1,025, gave Labor a 51-49 lead, a one-point gain for the Coalition since the post-budget Essential. Primary votes were 40% Coalition (up two), 36% Labor (steady), 10% Greens (steady) and 8% One Nation (up one).
With a Coalition primary vote at 40%, this poll would have been a 50-50 tie using Newspoll’s new methods. Essential continues to use the 2016 preference flows for its two party results. This poll was taken before Parliament resumed.
After a detailed question, 45% supported Labor’s tax plan proposal, while 33% supported the government’s. Most voters are not familiar with this much detail on policies. Similarly, voters supported Labor’s plan for the economy by 44-38 after much detail on Labor and Coalition proposals.
32% (up six since March) would trust Labor to manage a fair tax system, while 32% (up four) would trust the Coalition, and 22% (down nine) say there would be no difference between the major parties.
Just 34% correctly named the Queen of Great Britain as Australia’s Head of State, with 30% selecting the Governor-General and 24% the PM. By 48-30, voters would support Australia becoming a republic with its own Head of State (44-29 in January). 65% thought an Australian Head of State should be directly elected, 12% appointed by a two-thirds parliamentary majority, and 9% appointed by the PM.
Tasmanian Senator Steve Martin joins the Nationals
As a result of the citizenship fiasco, Jacqui Lambie resigned from the Senate, and her place was taken by the second candidate on her ticket, Steve Martin. Martin refused to resign, which would have allowed Lambie to retake her seat, and was expelled from the Lambie Network.
On Monday, Martin joined the Nationals. While Lambie was conservative on immigration issues, she was a reliable vote for the left on economic issues. Martin’s replacement of Lambie is a clear loss for the left. The Coalition will have a slightly easier path for its legislation, with 31 seats, up from 30. 39 votes are required for legislation to pass the Senate.
Super Saturday: July 28
Last week, the Speaker of the House announced that the byelections for the five lower house seats of Braddon, Longman, Mayo, Perth and Fremantle would not be held until July 28. Labor’s conference had been scheduled for that weekend, and has had to be postponed.
While Labor is very unhappy with the byelection timing, it may be a favour. The rights of asylum seekers are important to Labor’s left, but not to the general public. Public division within Labor over the treatment of asylum seekers could damage them. Policy on asylum seekers is an issue where the public backs the right.
In brief: Tasmanian polling, Ireland abortion repeal referendum
An early May Tasmanian EMRS poll gave the Liberals 47%, Labor 30% and the Greens 14%. The upper house seat of Prosser held an election on May 5, and the Liberals won it on May 15 after preferences were distributed. You can read more about this at my personal website.
On Friday, Ireland repealed the eighth constitutional amendment by an unexpectedly large 66.4-33.6 margin. The eighth amendment, passed in 1983, had greatly restricted abortion rights. The effect of repeal is that Parliament can legislate on abortion. You can read my preview for The Poll Bludger here, and my results report here.
Cutting taxes lets companies keep more of their profits, allowing them to invest in new equipment and premises for example. The company then needs to hire more workers to work with these new assets. The newly created jobs require businesses to compete for workers and this increased demand pushes up wages across the entire economy.
Suppose a retail company gets a tax cut and opens a new store. It advertises for workers, many of whom are already employed by a rival store that didn’t get the tax cut. The first company will need to offer the workers higher wages to entice them away. The rival store will need to consider matching the wages in order to keep the workers.
In other words, even workers in companies that don’t receive the tax cut should see a wage rise.
Going through the AlphaBeta report
In 2015, the federal government cut the tax rate from 30% to 28.5% for businesses with less than A$2 million in revenue. Eligible businesses saved around A$2,940 on average because of the tax cut.
AlphaBeta used transaction data from 70,000 businesses to compare businesses just below the A$2 million threshold to companies that were just above it.
The analysis looked at the differences between the two groups of firms in terms of whether they hired new workers, invested in their businesses, increased worker wages, or kept some of the cash as a reserve.
AlphaBeta chalked any differences between companies that received the tax cut and those that didn’t to the company tax cuts.
As reported in The Australian, AlphaBeta found that companies that received the tax cut increased their employee headcount by 2.6%. The companies that didn’t receive the cut increased employment by just 2.1%.
The problem is that we cannot draw any conclusions about the effect of company tax cuts on jobs or wages by studying a bunch of firms that received them and another bunch that did not, even if the firms are only slightly different.
This is because, as noted above, the effect of company tax cuts on jobs and wages take place in the entire labour market. An increase in demand for labour flows through to all business, and therefore, so do higher wages.
So we should not expect to see wages rising only in those businesses that receive the tax cuts. The finding that an increase in wages is small and insignificant is exactly what we would expect to see from this study.
Another problem is that we do not know whether the characteristics of the companies in AlphaBeta’s sample. Were some industries with particularly pronounced employment or wage increases over represented in one group but not the other, for instance?
Studying the effect of company tax cuts on employment and wages also requires a longer time period – sometimes years – and careful control of other factors affecting jobs and wages in some firms relative to others.
The analysis in this review is generally fair and reaches a sound conclusion regarding the AlphaBeta report. However, the logic behind company tax cut raising wages is somewhat simplified.
A cut in company tax lowers the costs of production and can flow to labour, capital (including equipment and buildings) and consumers. Economics tells us that who actually benefits from a tax cut depends on what is more responsive to the tax – labour, capital or output.
The lower production costs from a company tax cut can lead to greater output and lower prices as consumers buy more goods and services. This depends, of course, on how responsive consumers are to changes in price.
In the short-run labour is more mobile than capital, which is usually regarded as fixed. Therefore, in the short-run most of the benefit is borne by owners of capital (the companies) in the form of higher after-tax profits.
However, over the longer term, companies invest their after-tax profits in the business. So most of the benefit of the tax cut goes to workers though higher wages as the increased “capital stock” (such as equipment) makes labour more productive.
It follows that there is no reason to expect a significant increase in wages over a period of one or two years (as the AlphaBeta report covers). Indeed, such a result would be somewhat surprising. – Phil Lewis
In this series – Budget policy checks – we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.
In this piece we look at the need for company tax cuts.
Business investment in Australia declined steadily for four years after peaking in 2013. In early 2016, the Turnbull government settled on a series of company tax cuts as their preferred policy to reinvigorate business investment and the economy.
Our modelling shows that a cut to the company tax rate for large businesses will indeed lift foreign investment in Australia, driving an economic expansion and an increase in pre-tax wages, but there is more to the story.
Like many policy changes, there are winners and losers. The give-and-take nature of the tax cut means that the “losers” from the tax cut will be Australian-owned businesses and the Australian government. We find that despite the expansion in GDP, the average income of the Australian population (a more suitable measure of the material welfare of the population) will fall.
Do we need investment to maintain jobs and economic growth?
The jobs growth figures last year – we all know now, more than 1,100 jobs a day – that’s had a really big impact on our economy and we can expect that to continue and now lead to – I would expect – better wage outcomes as long as businesses keep investing and businesses can keep remaining competitive.
– Treasurer Scott Morrison
More investment creates more buildings, equipment and intangible assets that enable workers to be more productive and, in theory, earn higher wages.
If investment is weak for a prolonged period, job opportunities are reduced and wage growth will weaken.
In a well-functioning economy, population growth and technological progress naturally attract investment. When investment only keeps pace with population or employment growth, wages stagnate. For wages to grow, investment needs to be above this level. This happens when there is technological progress, generating the higher returns which attract the level of investment needed.
Australian investment depends largely on foreign finance, so world economic conditions, including rates of corporate tax in other countries, also play a role.
In reality the link between investment and wages is not always clear cut. If unemployment or underemployment is high, investment may lead to growth in jobs without wage growth.
Businesses might also make profits in excess of a “normal” rate of return. These profits exist when new businesses struggle to break into a market dominated by a few large players, and can be an impediment to wage growth.
Even if you do accept that higher investment does lead to higher wages, giving tax cuts to companies to stimulate investment is not justified on this basis.
If company taxes are cut there will be significant costs to government revenue that amount to a “windfall gain” to the (mostly foreign-owned) investments that have already been made on the basis of the 30% tax rate. On balance, the positive impact on growth and wages is not enough to justify the loss of this revenue.
Is there a problem with business investment in Australia?
Business investment is critical to economic growth. When firms are empowered to invest in new productive capacity and technology, it supports innovation and helps create new opportunities and employment for Australians.
– Treasurer Scott Morrison
Business investment is now showing signs of picking up. In a speech late last year, Reserve Bank deputy governor Guy Debelle saw “signs of life” in investment growth, particularly in the services sector and in infrastructure projects completed by the private sector on behalf of the public sector.
A Grattan Institute report identifies four very good reasons for the four-year decline. These include a return to “normal” investment following the mining boom and an overall decline in the amount of money needed to create capital goods in most industries. The report also points to an ongoing shift towards households spending more on services such as retail, cafes, and professional services and slow economic growth overall.
Viewed in this light, there are plausible and benign reasons underlying the decline in investment. These suggest that it is not a large enough problem to justify “repair” in the form of a costly tax cut.
What’s the verdict?
Certainly business investment has weakened over the last five years, and along with this we have seen weak wage growth. It would be foolhardy to argue against the need for more business investment. Jobs and growth underpinned by a healthy level of investment are essential aspects of a modern society.
But cutting the company tax rate is not the way to go. It may deliver more business investment and economic activity, but by forgoing taxation revenue from existing investment, it comes at a cost to the average income of the Australian people.
To reap the benefits of strong business investment without a costly tax giveaway, Australia must continue to play to its strengths. Reducing the government revenue base through a cut to company tax will undermine the sort of stable, prosperous society that underpins the world-class environment that we strive to offer all investors.
A ReachTEL poll for Sky News, conducted March 28 from a sample of over 2,000, gave Labor a 54-46 lead, unchanged since late February. Primary votes were 36% Labor (down one), 34% Coalition (up one), 10% Greens (down one) and 7% One Nation (steady).
ReachTEL uses respondent allocated preferences. The primary votes imply a swing to the Coalition, though that swing is from the ReachTEL taken the day before Barnaby Joyce resigned as Nationals leader. Analyst Kevin Bonham estimated the February ReachTEL as 55.5% two party to Labor by last election preferences, and this ReachTEL at 54.2%.
Malcolm Turnbull led Bill Shorten by 52-48 as better PM in ReachTEL’s forced choice question (53-47 in February).
By 56-29, voters opposed tax cuts for big companies. 68% thought it unlikely that tax cuts would be passed on to workers, with just 26% thinking it likely. The government was unable to pass its company tax cuts through the Senate before parliament adjourned until the May budget.
By 64-25, voters did not want Tony Abbott to return as Liberal leader after the next election. 37% opposed Labor’s plan to alter the tax treatment of franking credits, 27% were in favour and the rest were undecided.
Newspoll: 53-47 to Labor
In last week’s Newspoll, conducted March 22-25 from a sample of 1,600, Labor led by 53-47, unchanged since early March. Primary votes were 39% Labor (up one), 37% Coalition (steady), 9% Greens (steady) and 7% One Nation (steady).
As has been much discussed, this Newspoll was Turnbull’s 29th successive loss as PM, just one behind Abbott’s 30 losses. Labor’s primary vote was its highest since Abbott was still PM, and the total vote for Labor and the Greens was 48%, up one point – the first change in the total left vote since August.
Turnbull’s net approval was up one point to -24, while Shorten’s improved three points to -20. Turnbull led Shorten by 39-36 as better PM (37-35 previously).
By 50-33, voters were opposed to Labor’s franking credits policy. I believe Labor has gained despite this opposition as those strongly opposed are likely to be Coalition voters anyway. In addition, Labor’s policy may give it more economic credibility as they may be seen as more likely to balance the books.
On Monday, The Australian released Newspoll’s February to March analysis. In Queensland, the Coalition improved from a 55-45 deficit in October to December to a 51-49 deficit. It appears Newspoll is now assuming One Nation preferences flow to the Coalition at about a 65% rate, consistent with the Queensland state election; previously they assumed the Coalition would receive just half of One Nation preferences.
With One Nation’s Queensland vote at 13%, the four-point gain for the Coalition is partly due to the changed preference assumptions. Under the previous method, Labor would lead in Queensland by 52-48 or 53-47.
Turnbull’s net approval with those aged 18-34 was just -3, compared with -20 overall, yet the left-wing parties dominated this age group with a combined 57%, to just 30% for the Coalition and 4% One Nation. Turnbull has been seen as a social progressive, restrained by the conservative Coalition base. Young people are far more likely to like Turnbull than they do the Coalition generally.
Turnbull’s persistent lead over Shorten as better PM can be explained by a lead with young people, among whom the Coalition would be crushed at an election.
Essential: 52-48 to Labor
Unlike ReachTEL and Newspoll, last week’s Essential moved two points to the Coalition, though Labor retained a 52-48 lead. Primary votes were 38% Coalition (up two), 36% Labor (down two), 9% Greens (steady) and 8% One Nation (steady). This poll was conducted March 22-25 from a sample of 1,027.
Only 21% understood a lot or a fair amount about franking credits. 10% said they received a cash payment from franking credits and 16% a tax deduction. By 32-30, voters supported Labor’s plan on franking credits.
Voters generally supported left-wing tax ideas, though they supported “cutting the company tax rate to 25%” by 40-30, in contrast to ReachTEL. Voters trusted the Coalition over Labor 28-26 to manage a fair tax system, with 31% opting for no difference.
By 79-12, voters thought there should be more regulation of Facebook, and by 68-22, they were concerned about how Facebook uses their personal information. Nevertheless, voters thought Facebook is generally a force for good by 45-37.
In the early March Essential, concerning the Adani coal mine, 30% supported the Greens’ anti-Adani position, 26% the Liberals’ pro-Adani position, and just 19% Labor’s murky position. 38% of Labor voters supported their party, 31% the Greens and 15% the Liberals. Other voters supported the Greens by 40-26 over the Liberals with 11% for Labor.
Voters supported regulating energy prices 83-7, creating a new Accord between business, unions and government 66-11, increasing the Newstart allowance 52-32 and company tax cuts 42-39. These proposed measures were all asked with a question phrased to skew to support.
By 65-26, voters supported same sex marriage (61-32 in October, before the result of the plebiscite was known).
Victorian and ACT federal draft redistribution
Last year, it was determined that Victoria and the ACT would each gain a House seat, giving Victoria 38 House seats, up from 37, and the ACT three seats, up from two. On Friday, draft boundaries were released.
The Victorian redistribution creates the new seat of Fraser in Melbourne’s north-western growth suburbs, which will be a safe Labor seat. According to the Poll Bludger, Labor also notionally gains Dunkley from the Liberals, and the renamed Liberal-held seat of Cox (formerly Corangamite) is very close.
In other changes to state representation, South Australia will lose a seat, falling from 11 seats to ten. The total number of House seats will increase by one, from 150 to 151. The new draft South Australian boundaries will be released on April 13.
At the 2016 election, the Coalition won 76 of the 150 seats, and Labor 69. The draft boundaries released Friday give Labor three extra notional seats, while the Coalition loses two. With the South Australian redistribution still to come, the Coalition has notionally lost its majority, and will require a swing in its favour at the next election to retain a majority.
The draft boundaries will go through a further consultation process before they are finalised. If an election is called before all boundaries are finalised, emergency redistributions are used. These emergency redistributions have never been used.
Batman byelection final results
At the March 17 Batman byelection, Labor’s Ged Kearney defeated the Greens’ Alex Bhathal by a 54.4-45.6 margin, a 3.4% swing to Labor since the 2016 election. Primary votes were 43.1% Labor (up 7.9%), 39.5% Greens (up 3.3%) and 6.4% for the Conservatives. The Liberals, who won 19.9% in 2016, did not contest.