Government ‘dares’ the Senate on its corporate and income tax packages


Michelle Grattan, University of Canberra

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.

The ConversationIt 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.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

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Poll wrap: Newspoll asks skewed company tax cut question as Labor gains



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Prime Minister Malcolm Turnbull has notched up his 33rd consecutive twp party preferred Newspoll loss as leader.
AAP/Dean Lewins

Adrian Beaumont, University of Melbourne

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.




Read more:
Turnbull and the Coalition begin the year on a positive polling note – but it’s still all about the economy


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.




Read more:
Poll wrap: Newspoll not all bad news for Turnbull as Coalition’s position improves


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.




Read more:
Centre Alliance’s Rebekha Sharkie most vulnerable at byelections forced by dual citizenship saga


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.

The ConversationOn 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.

Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne

This article was originally published on The Conversation. Read the original article.

Research check: we still don’t have proof that cutting company taxes will boost jobs and wages



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There still isn’t clear research showing company tax cuts will increase employment or wages.
Shutterstock

Ross Guest, Griffith University

If you read these headlines you might think we finally have proof that cutting company taxes will boost employment and investment:

These stories are based on analysis of the 2015 company tax cut by consultants AlphaBeta. But the study, as well as some of the media coverage of it, show a worrying misunderstanding of how company tax cuts work.

Simply comparing companies that receive a tax cut with those that don’t isn’t the right methodology to conclude that the 2015 tax cuts created more employment or higher wages.




Read more:
There isn’t solid research or theory to support cutting corporate taxes to boost wages


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.




Read more:
The full story on company tax cuts and your hip pocket


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%.

This difference turned out to be “statistically significant”, meaning it is very unlikely to be the result of random chance.

As the Sydney Morning Herald pointed out, AlphaBeta also concluded that 51% of the tax cut was kept as cash, 27% went towards new investment, but only 3% was paid to workers in higher wages.

In other words, wages increased by just A$1.44 per week. This is not only a small amount, it was also found to be not statistically significant.

Problematic methodology

The main issue with this study’s methodology is actually noted by AlphaBeta in the report itself (and echoed in the coverage by the ABC and Sydney Morning Herald).

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.

Blind review:

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.

The ConversationIt 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

Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

This article was originally published on The Conversation. Read the original article.

Budget policy check: do we need company tax cuts?


Janine Dixon, Victoria University

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.

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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.

The ConversationTo 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.

Janine Dixon, Economist at Centre of Policy Studies, Victoria University

This article was originally published on The Conversation. Read the original article.

Poll wrap: Labor maintains its lead as voters reject company tax cuts; wins on redrawn boundaries



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The results of next week’s Newspoll will be eagerly awaited on both sides of the House.
AAP/Mick Tsikas

Adrian Beaumont, University of Melbourne

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.

Labor won the ACT-wide vote by 61-39 against the Liberals at the 2016 election, so the new ACT seat had to be a Labor seat.

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.




Read more:
ReachTEL: One Nation voters prefer Abbott to Turnbull by over 3:1


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

The ConversationAt 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.

Adrian Beaumont, Honorary Associate, School of Mathematics and Statistics, University of Melbourne

This article was originally published on The Conversation. Read the original article.

Government defers company tax cut vote for want of numbers


Michelle Grattan, University of Canberra

The government has been forced to put off a vote on its tax cut for big business after failing to secure support from the final two crossbenchers it needs to pass the legislation.

The deferral until the budget session in May is a bitter disappointment for the government, which had been hopeful of landing the legislation this week.

It needs nine of the 11 non-Green crossbenchers to pass legislation. It had seven on side but still needed Victorian senator Derryn Hinch and South Australian independent senator Tim Storer.

Hinch has most recently been talking to the government about trade-offs in the areas of help for pensioners, affordable housing, assistance for the older unemployed, and more action to combat paedophilia.

One source said Storer’s inexperience – he only arrived in the Senate last week – was a complication in finalising negotiations.

Storer said lower company tax should be part of broader tax reform. “This bill is a narrowly cast proposition of change to the overall tax and transfer system”, he said.

“I have held numerous meetings and received input from stakeholders including members of the public, South Australian businesses and business-groups, leading economists, national welfare groups, national business councils and their members” and “I am processing my consideration of this bill.”

The legislation is for the second tranche of the tax cuts, which is directed for big business. It would cost the budget A$35.6 billion, apply to companies with turnovers of more than $50 million annually, and bring the rate for them down from 30% to 25% by 2026-27.

Finance Minister Mathias Cormann told the Senate late on Tuesday that the legislation would not be debated further this week.

“It is a matter of public record that, as a result of the work that has gone so far, we have been able to secure the publicly stated support of 37 senators in this chamber for our business tax cuts legislation,” he said.

“Everybody knows we need 39. So, given that proposition and given that’s the situation we are in, the government has made a decision we will need to do some more work.”

He said the government thought it could get the numbers and so was “committed to keep working, to keep engaging”.

Cormann said the government intended to bring the legislation back to the Senate in the next sitting week – which is budget week.

Speaking to a function organised by the Business Council of Australia (BCA) at Parliament House, Malcolm Turnbull said the government was still two votes short and encouraged the businesspeople to keep talking to the crossbench.

He said the government wasn’t fighting for higher dividends or higher remuneration for executives but to give companies every incentive to invest and grow, creating more jobs and higher-paid jobs.

Earlier on Tuesday, Opposition Leader Bill Shorten pledged a Labor government would repeal the legislation if it passed. He said the opposition would decide its position on the tax cuts already passed for businesses with annual turnovers up to $50 million “in the context of the information we receive in the budget”.

The case for the tax cuts received a setback on Tuesday with the reporting of a secret BCA survey finding that fewer than one in five of leading chief executives had said they would use the proposed cut to directly increase wages or employ more staff. The Australian Financial Review reported that “more than 80% said they would either use the proceeds to boost returns to shareholders or invest in the company”.

The BCA played down the survey, saying it had never been finished.

Last week, the BCA released a letter signed by ten business leaders, saying: “If the Senate passes this important legislation we, as some of the nation’s largest employers, commit to invest more in Australia which will lead to employing more Australians and therefore stronger wage growth as the tax cut takes effect”.

The Australia Institute, lobbying against the legislation, wrote to senators with a brief about reaction to the Trump cuts.

The Conversation“Critically, the evidence shows it is not workers and employees who are benefiting most from the tax cuts. In fact, the tax cuts will exacerbate inequality with benefits flowing overwhelmingly to wealthier Americans via, for example, share buy-backs,” the institute’s executive director, Ben Oquist, wrote.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

How the government can pay for its proposed company tax cuts



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The government is still attempting to lower the corporate tax rate to compete globally.
Ben Rushton/AAP

David Ingles, Crawford School of Public Policy, Australian National University and Miranda Stewart, Crawford School of Public Policy, Australian National University

There are ways the government can pay for a cut in the company tax rate. In a recent working paper, we worked with researcher Chris Murphy to model three different options: reforming Australia’s system of giving shareholders tax credits, allowing less tax deductions on interest for companies, and introducing a tax on the super-profits of banks and miners.

After taking economic growth into account, the budget cost of the tax cut could be net A$5 billion a year.




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Race to the bottom on company tax cuts won’t stop tax avoidance


In the US, a company tax cut to 21% continues an inexorable global trend of cutting rates, making international tax competition even more pressing. As our working paper noted, Australia’s rate is now higher than most other countries, making tax avoidance even more attractive and deterring inbound foreign investment.

A cut in the Australian company tax rate to 25 or even 20% is important because it will attract foreign investment, boosting wages and the economy in Australia.

Remove dividend imputation

Australia has an unusual system of integrated company and personal tax, called dividend imputation. It has been in place since the 1980s.

Australian shareholders receive franking (imputation) credits for company tax. If shareholders are on a personal tax rate less than 30%, they receive a refund.

The company tax cut could be financed by removing dividend imputation. Our modelling indicates a company tax rate of 20% would mean the government breaks even, while halving imputation could finance a 25% rate.

It would be simpler to abolish dividend imputation and replace it with a discount for dividend tax, at the personal level.




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Dividend imputation only makes sense if we assume Australia is a closed economy with no foreign investors. In reality, Australia depends on inflows of foreign investment. About one-third of the corporate sector is foreign owned.

The likely source of additional finance, especially for large Australian businesses, is a foreigner who does not benefit from dividend imputation. So the company tax pushes up the cost of capital and domestic investors benefit from franking credits for a tax they don’t actually bear.

But the politics of making a change to the system are difficult, because domestic investors, especially retirees on low incomes and superannuation funds would lose out. But this approach could benefit workers, jobs and Australian businesses.

Broaden company tax by removing interest deductibility for companies

Another approach is to remove or limit deductibility of interest for companies. This can raise the same revenue at a lower rate, by allowing less deductions. Excessive interest deductions are used by multinationals to reduce their Australian tax bill, as shown in the recent Chevron case.

This would be like imposing a withholding tax on interest paid offshore. We explore a comprehensive business income tax on all corporate income. Modelling shows that this tax would finance the rate cut to 25%.

The comprehensive business income tax raises some difficult issues for taxing banks. This is because their profit is interest income less interest expense.

But there are numerous policies to restrict interest deductions already in place, here and around the world. These restrictions could be expanded. For example the thin capitalisation rules limit of the amount of loans a business can have relative to equity.

We still need anti-abuse rules because businesses can use other methods to minimise tax, as canvassed by the OECD in its Base Erosion and Profit Shifting project, including transfer pricing, and deductible payments offshore for intellectual property fees.

A rent tax or allowance for equity

A third option for a company tax cut is to change to a tax with a lower effective marginal rate. This means that the return on a new investment is taxed less heavily than under a company income tax.

We could introduce an allowance for corporate equity, or corporate capital, which provides a deduction for the “normal” or risk-free return for capital investment. This is also called an economic rent tax because it only taxes the above-normal profit.

Modelling shows that the allowance for corporate capital encourages new investment, which helps economic growth, but there is a large budget cost. The extra deduction reduces the overall tax take and so a higher rate is needed for the same revenue.

It is unlikely Australia would want to maintain or increase our company tax rate, as this directly contrary to the global trend and can lead to even more tax planning by businesses.

For Australia, a supplementary rent tax aimed at the financial and mining sectors – where above-normal returns are known to occur – could be combined with a lower company income tax. Modelling this option for the finance sector shows a large welfare gain and sufficient revenue to fund the rate cut to 25%.

The government has a lot of choices

We show that the government has many options available to finance the needed corporate rate cut and improve efficiency of the company tax.

Policymakers could mix and match these options. Dividend imputation could be replaced with a discount and combined with a comprehensive business income tax. Limits on interest deductibility could be combined with a part allowance for corporate capital.

The ConversationReplacing dividend imputation with a dividend discount at the personal level could be the best initial step. Other options for major reform of Australia’s company tax need to remain on the table, as company taxes drop to a new low and systems are reformed around the world.

David Ingles, Senior Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University and Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University

This article was originally published on The Conversation. Read the original article.

The government’s company tax cut win a triumph of politics over economics


Brett Govendir, University of Technology Sydney and Roman Lanis, University of Technology Sydney

Now that the first stage of a cut to the corporate tax rate has been passed by the Senate it’s clear the benefits are more political than economic. The cut may signal to the world that Australia wants to be competitive on corporate tax, but it won’t make much of a difference to our largest businesses and multinationals. The Conversation

Company tax cuts have been on the government’s agenda since the 2016 budget, when the cuts were announced. Ultimately, the plan was to reduce the corporate tax rate from 30% to 25% by the 2026-27 financial year for all companies.

The government has secured a cut to businesses with a turnover of under A$50 million, with companies with a turnover of less than A$10 million receiving a reduction in their tax rate (to 27.5%) this financial year. But the second stage of the tax cut is still to be passed, that would give a cut to businesses with a turnover of A$100 million in 2019-20.

The impact is all in Australia’s image

Arms of multinational companies often pay a much lower effective tax rate when compared to their parent company. Until politicians across the globe can agree how to ensure companies pay tax on local earnings, which appears unlikely in the near future, tax rates will remain a signal to multinationals on where to base their business.

The tax cuts have been strongly supported by big companies and even more so by the Business Council of Australia. A major reason put forward by the business community is the need to stay competitive in a global environment.

Our major trading partners such as the United Kingdom and United States are planning to drastically reduce their corporate tax rates and countries such as Ireland (12.5% on corporate trading profit) and Singapore (by 2018 20% capped at $20,000) already have very low corporate tax rates in place. Multinational corporations have the ability to profit shift to lower taxing jurisdictions.

For instance, a multinational can employ tax accountants to structure ownership of intellectual property in a low taxing jurisdiction and reduce gross income by license fees, or via debt loading to a parent company. Tax avoidance is often siphoned through a non-reporting subsidiary, so these accounting tricks occur without the glare of public scrutiny. In other instances multinationals have been able to completely bypass Australian tax by booking revenues overseas.

How it will affect accounting for Australian companies

When you look at what a tax cut might mean to Australian companies, it’s not hard to envisage how a tax cut tied to a specific revenue level creates incentives for accountants and lawyers to exploit new thresholds.

Accounting research from the United States shows companies do take into account tax when considering how to report their profits. For example, a typical strategy is to delay recognising an expense that belongs in the current year, until the next year.

This is usually to make it seem like the company has increased its profits, making it appear better to shareholders. However there have been no studies specifically relating to how companies might do this in relation to revenue (what the Australian government is considering for the tax cut).

At any rate, the net rate of tax on Australian company profits is considerably lower than the current 30% (or the new 27.5%) company tax rate. According to our calculations it should be around 11.3%. This is lower than the company tax rate in other similar economies.

There’s also something unique to Australia which means private companies pay less tax and that’s dividend imputation. This is designed to eliminate the double taxation of dividends in the hands of Australian shareholders.

Since it’s introduction in 1987, dividend imputation has provided strong incentives for firms to pay the full statutory tax rate on all reported profits. The tax paid on dividends flowing to Australian shareholders of Australian companies is reduced by an amount equal to the tax already paid by the corporation, this is known as imputation credits. A shareholder’s marginal tax rate, and the tax rate for the company issuing the dividend, both affect how much tax an individual shareholder owes on what is called a fully franked dividend.

Companies that pay fully franked dividends in Australia, pay on average over 10% additional tax on the same level of earnings than companies not paying franked dividends. Approximately 62.3% of imputation credits are utilised by resident shareholders.

The average effective tax rate of Australia’s largest private companies are much lower than that of the largest public companies (most of which pay fully franked dividends). You can see this in the table below which shows the effective tax rates calculated by two separate studies.

https://datawrapper.dwcdn.net/3Hvfs/2/

One of the studies by the union United Voice looked at the ASX200 companies and the otherby lobby group GetUp examined the largest private companies operated by foreign multinationals.

The corporate tax rate does figure in investment decisions of Australian companies and foreign companies wanting to do business in Australia. However, the rate of corporate tax is at best a second order effect in influencing the decisions of foreign companies. Therefore, the gains from the government win in the Senate appear to be more political than economic.

At best the tax cut may somewhat reduce the burden on smaller Australian companies, albeit at a significant cost to the budget, without impacting the largest Australian and foreign multinationals. Although prospects for further tax cuts for the big end of town (which has a greater impact on the economy) are unlikely in the next five to 10 years without Senate crossbencher support.

Brett Govendir, Lecturer, University of Technology Sydney and Roman Lanis, Associate Professor, Accounting, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.

What economists and tax experts think of the company tax cut


Jenni Henderson, The Conversation

Prime Minister Malcolm Turnbull and the Treasurer Scott Morrison are still trying to sell their plan to cut the company tax rate to 25% by 2026-27. The current rate is 30% and has been since 2001.

The tax cut was introduced in the 2016 federal budget. The government indicated small to medium businesses turning over less than A$10 million would pay a company tax of 27.5% initially. The company turnover threshold for the tax cut would then increase over time from A$10 to $25 million in 2017-18 to A$50 million in 2018-19 and finally A$100 million in 2019-20.

But before any of this happens, the government needs to convince the senate crossbenchers to pass the legislation. It seems the government hasn’t won over tax experts and economists with this policy, here’s some articles that explain why.

Don’t expect an instant wage increase

In a national press club address Malcolm Turnbull justified the tax cut by saying, “company tax is overwhelmingly a tax on workers and their salaries.” It follows that cutting it would increase salaries right?

However there’s a whole lot of decisions businesses need to make before they even consider raising wages. It’s not just as simple as the government makes out, as professor John Freebairn from the University of Melbourne notes:

Individuals benefit from lower corporate tax rates with higher market wages. But the higher wage rates will take some years to materialise, and the magnitude of increase attributed to the lower corporate tax rate, versus other factors, is open to debate.

Businesses would need to consider the savings of international investors, what resources the business might need, what the return for investors would be on these. All of this before it would consider a wage increase for its workers.

The enlarged stock of capital, technology and expertise per worker becomes a key driver of increased worker productivity. In time, more productive workers are able to negotiate higher wages. Via this chain of decision changes, employees benefit from the lower corporate tax rate.

Any modelling on how much a tax cut could be worth to our economy is up for debate

Modelling is sensitive to whatever assumptions the government makes and these assumptions can be oversimplified. ANU principal research fellow Ben Phillips points out that tax reform like this inevitably has winners and losers and is influenced by powerful lobby groups.

In thinking about tax reform it is important to keep in mind that the gains from modest tax reform are not likely to be a revolution in Australia. The models themselves only estimate relatively small gains from tax reform.

Here’s a little something to bear in mind when hearing any figures thrown around on how much a company tax cut could be worth:

Over the past 25 years Australia’s living standards have increased by around 60% whereas the sorts of gains estimated from tax reform are expected to be little more than 1 or 2%. It remains important that in securing such modest gains we don’t ignore fairness.

The benefit to the domestic economy won’t be that big

The idea behind the cut is that companies will be motivated to provide jobs and other economic benefits because they are receiving a tax break. In theory this kind of tax should boost the economy in the long term, but as John Daley and Brendan Coates from the Grattan Institute explain it’s not that simple.

In Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.

The Grattan researchers point out that if companies pay less tax then they might reinvest what they save, but in practise most profits are paid out to shareholders. So the tax cut won’t have much of an impact on domestic investment.

They also pick holes in the Treasury’s modelling on the tax cut’s boost to Gross National Income (GNI).

Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.

It doesn’t make much of a difference

Another argument for cutting Australia’s company tax rate is to deter companies from shifting their profits to other countries where the tax rate is lower. Recently President Trump promised to cut the United States federal corporate tax rate from 35% to 15%.

Antony Ting, associate professor at the University of Sydney notes most countries have been reducing their company tax rates over the past two decades. This hasn’t changed the incentive for multinationals to avoid taxes.

The tax-avoidance “success” stories of multinational enterprises such as Apple, Google and Microsoft suggest this argument is weak. The fact is that the profits these multinationals shift offshore often end up totally tax-free.

A FactCheck by Kevin Davis, research director at the Australian Centre for Financial Studies, reviewed by economist Warwick Smith, says there’s no point to comparing Australia’s company tax rate with other countries anyway.

Australia’s dividend imputation tax system means that any comparison of our current 30% rate with statutory corporate tax rates elsewhere is like comparing apples and oranges.

Small and medium businesses actually lose out

Due to the way the proposed company tax cut is structured, foreign investors get a windfall while local employers including small and medium businesses cop a cost because they remain uncompensated.

Economist Janine Dixon from Victoria University modelled how the cut would play out.

Local owners of unincorporated businesses are taxed at their personal tax rate. Because of Australia’s dividend imputation system, Australian shareholders in incorporated business are also taxed at their personal rate, not the company tax rate.

She explains that 98% of small businesses (employing four or fewer people) are wholly Australian owned and because of this are indifferent to the cut, but 30% of large businesses (employing more than 200 people) have some component of foreign ownership.

An increase in foreign investment is generally understood to be a driver of wage growth. This is the basis for the argument that at least half of the benefit of a cut to company tax flows to workers… We find that benefit to foreign investors will exceed the total increase in GDP. In the domestic economy, benefits to workers will be more than offset with a negative impact on domestic investors and the need to address additional government deficit.

Other things are just as important

Even if some businesses are keen for a tax cut, meaning more money in the kitty, it’s how these businesses spend this money that counts.

Jana Matthews from the Centre for Business Growth at the University of South Australia says many CEOs are uncertain about what to do in order to grow their business and are fearful of making the wrong decisions.

We need to focus as much attention on the management education of founders, CEOs and MDs [managing directors] of medium-sized companies as we do on providing them with more money. Once they learn how to grow their companies, they will definitely need money to become the engines of growth, and they will certainly hire more people, creating the jobs we all want.

The Conversation

Jenni Henderson, Editor, Business and Economy, The Conversation

This article was originally published on The Conversation. Read the original article.