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

Fabrizio Carmignani, Griffith University

The argument that cutting the Australian company tax rate will lead to higher investment and wages, more employment and faster GDP growth does not have solid empirical or theoretical backing.

A close look at the economic research in this area shows a lack of consensus. Different studies, looking at different samples of countries, over different periods of time, reach different conclusions.

And the predictions made by theoretical models are sensitive to the underlying assumptions and structures built into the models themselves.

Many of the issues surrounding tax cuts remain unsettled – such as the size or length of the impact, how it affects inequality and the relationship with other government policies.

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The recent International Monetary Fund (IMF) forecast for the American economy highlights some of the issues.

In short, the IMF acknowledges that the recent US tax cuts will have a positive impact on economic growth in 2018-19. However, this is conditional on the US government not cutting expenditure, is likely to be short-lived, and will come at the cost of increased government deficits.

In this light, corporate tax cuts seem to be a long-term pain for a short-term gain, which is probably not what we need in Australia.

Conflicting information

Let’s start with the point that is probably least controversial – that a reduction in the corporate tax rate will lead to an increase in wages.

Think of the output produced by a corporation as a pie. This pie is shared among shareholders (in the form of dividends), banks and other lenders (in the form of interest paid on loans), workers (in the form of wages) and the government (in the form of taxes).

If we reduce the government’s share then there is more for everybody else, including workers. And some data do suggest that wages increase when corporate tax rates decline.

Yet economists disagree on the extent to which wages would actually increase in response to a tax cut.

Some research suggests that this increase might be small, even in a country like Germany, which is often used as an example of the beneficial impact of tax cuts on wages.

Certain aspects of the German economy and industrial relations system make it more likely that German workers will benefit from corporate tax cuts compared to Australian workers.

In Germany, workers’ representatives sit on company supervisory boards, which monitor and appoint members of management boards.

This means German workers have a stronger say when it comes to sharing the pie. For any given decrease in the slice of the government, German workers are more likely to get a bigger slice for themselves. This is not necessarily the case in Australia.

It is therefore difficult to draw implications for Australia from studies that look at the experience of Germany or other countries with significantly different institutional arrangements.

Furthermore, the fact that wages should increase in response to a corporate tax cut does not automatically imply that other economic variables will also respond positively. For instance, the more wages increase in response to a corporate tax cut, the smaller the increase in employment is likely to be.

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This leads to an even more controversial question: what is the effect of corporate tax cuts on real economic activity, such as employment and GDP growth?

The trickle-down effect of corporate tax cuts rests on the idea that business investment would increase once taxes are cut, which in turn leads to the creation of more jobs and faster economic growth.

However, this line of reasoning neglects the fact that investment decisions in today’s globalised world are not necessarily driven by the corporate tax rate.

Many other factors come into corporate investment decisions, such as the quality of institutions, the proximity to important markets, and the cost of labour (wages).

Because of these other factors, the impacts of tax cuts on employment and growth can be small, short-lived, or conditional on other government policy actions, such as managing debt.

In a similar vein, recent theoretical work that incorporates more realistic assumptions about the economy (such as the distribution of entrepreneurial skills in the population) suggests that a tax cut only has a significant impact on economic growth when the tax rate is initially high.

This means that even within a given country, the effect of a corporate tax cut can change depending on initial economic and policy conditions.

Putting tax cuts in a broader context

Beyond growth and employment, the effects of corporate tax cuts should also be considered in terms of deficit and inequality.

From the point of view of the public budget, a cut in the tax rate has to be somehow financed. How?

A first possibility is that the tax cut pays for itself. This is essentially the idea that as the tax rate goes down, the increase in the tax base (e.g. pre-tax corporate profit) is sufficiently large to ensure that the total tax revenue increases.

However, an increase in the tax base would require a significant and sustained increase in business investment, which, as we have already seen, does not necessarily happen.

The government could increase other taxes, but this means the government would effectively be taking from one group of taxpayers (possibly workers themselves) to give to corporations.

Another option is to reduce some government expenditures. But this could also involve taking from one group to give to another. If the decision is made to cut social welfare and public goods like education and health, then more vulnerable segments of the population will bear the cost of lowering the corporate tax rate. This means more inequality in the economy.

Of course the government could decide to just let the deficit be. This would result in higher debt. But can Prime Minister Turnbull (or President Trump for that matter) accept that?

The ConversationThe central economic challenge for Australia is to promote long-term, inclusive growth. Are we confident that this is what corporate tax cuts will deliver? Based on the economic research that I have read, the answer is no.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University

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


First Group of "Traditionalist" Anglicans in Britain Votes to Enter Catholic Church

By Hilary White

ROME, November 6, 2009 ( – In a move that is a surprise to no one, the UK branch of the Traditional Anglican Communion (TAC), the largest of the groups that broke away from the mainstream Anglican Church over the ordination of woman and the latter’s support for active homosexuality, has been the first to formally accept the offer of Pope Benedict to enter into communion with the Catholic Church en masse.

Although the TAC is not large, being made up of only 20 or so parishes, the vote by the group to accept the invitation is expected to be a strong symbolic blow to the mainstream Anglican Church in its motherland of Britain, where it has been a leader in the acceptance of woman clergy and homosexuality. It is widely acknowledged that the Vatican’s decision to extend its hand to traditionalist Anglicans comes in response to repeated requests, made public last year, by the TAC.

In a surprise announcement on October 20, the Vatican said that a document was being prepared that would create “personal ordinariates” that will allow “traditionalist” Anglicans to come into the Catholic Church in groups while retaining their liturgical and pastoral traditions, including the possibility of a married clergy. William Cardinal Levada, the head of the Congregation for the Doctrine of the Faith, said that the move had come in response to many requests from Anglicans around the world, clergy, laity and bishops, who objected to the growing acceptance of homosexuality in Anglicanism, especially in North America and Britain.

The website of the TAC in the UK reported last week, “This Assembly, representing the Traditional Anglican Communion in Great Britain, offers its joyful thanks to Pope Benedict XVI for his forthcoming Apostolic Constitution allowing the corporate reunion of Anglicans with the Holy See, and requests the Primate and College of Bishops of the Traditional Anglican Communion to take the steps necessary to implement this Constitution.”

The leadership of the Traditional Anglican Community in Canada told LSN in an interview late last month that the life and family issues are a major factor in the attraction of the Catholic Church. Bishop Carl Reid of the Traditional Anglican Communion in Canada, told (LSN), “When it comes to issues of morality, especially family and pro-life, our membership is very strongly on the same page as are Roman Catholics.”

The pope’s offer to Anglicans who adhere to traditionally Christian moral doctrine has infuriated the left in both the secular and religious worlds. Benedict XVI has been attacked most recently by former Catholic theologian and notorious opponent of Catholic moral teaching, Hans Kung, as well as innumerable journalists and editors who see the move as the Vatican turning back the ecclesial clock towards a pre-1960s traditional style. Kung accused Benedict, his former university colleague, of ecclesiastical “piracy” and said that the move undermines the decades-long work of “ecumenical dialogue.”

John Allen, the leading American “liberal” Catholic journalist in Rome, gave a more sedate analysis, saying that the invitation to the Anglicans who are in agreement on the nature of truth, doctrine and biblical inerrancy, is indeed part of the pope’s greater plan to combat the growing secularist “dictatorship of relativism” that the pontiff has warned is undermining the very structure of our civilization.

“Benedict XVI is opening the door to … traditionalist Anglicans in part because whatever else they may be, they are among the Christians least prone to end up, in the memorable phrase of Jacques Maritain, ‘kneeling before the world,’ meaning sold out to secularism,” Allen wrote in a column today.

Fr. John Zuhlsdorf, an American priest-blogger with connections inside the Vatican, has commented that with this decision (one that was fought by many bishops in his own Church), the pope has earned the title, “Pope of unity.”

The Anglicans who may take advantage of the new “canonical structure,” Zhusldorf wrote, “are Christians who are separated from clear unity with the Church. Pope Benedict stresses the importance of his role as Pope as being one of promoting unity. It is not just that they a Christians who tend to agree with him. They are separated. He is trying to reintegrate them.”

“If we are going to fight the dictatorship of relativism,” Fr. Zuhlsdorf continued, “we need a strong Catholic identity. If we are going to evangelize, we need a strong Catholic identity. If we are going to engage in true ecumenism, we need a strong Catholic identity.  Liturgy is the key component in his ‘Marshall Plan’ for the Church.”

This Report from 

Anglican Communion of U.K. first to accept Pope’s offer

Members of The Traditional Anglican Church in Great Britain have announced that they will enter into communion with the Vatican under Pope Benedict XVI’s Apostolic Constitution for Anglicans, reports Catholic News Agency.

According to the group’s website, members met on October 29 for their October 2009 Assembly. They scrapped their initial itinerary for the meeting following the Vatican’s Oct. 20 announcement that an Apostolic Constitution was being prepared in response to requests from groups of Anglican clergy and faithful wanting to enter into full communion with the Church. Instead, the assembly focused on what the news from the Vatican meant for the small group of Anglicans who are part of the Traditional Anglican Communion.

Anglican Bishop David Moyer released a statement describing the October Assembly as “grace-filled,” noting that everyone in attendance became “aware of the movement of the Holy Spirit.”

“The bishops, priests, ordinands, and lay representatives were brought to a place of ‘being in full accord and of one mind,’ as St. Paul prayed for the Church in Philippi,” Bishop Moyer wrote.

During the assembly, Bishop Moyer as well as Anglican Bishops John Hepworth and Robert Mercer fielded questions about the Vatican proposal before the Assembly unanimously passed resolutions written to carefully “and clearly reflect TTAC’s corporate desire and intention.”

The resolutions state that the Traditional Anglican Communion in Great Britain “offers its joyful thanks to Pope Benedict XVI for his forthcoming Apostolic Constitution allowing the corporate reunion of Anglicans with the Holy See, and requests the Primate and College of Bishops of the Traditional Anglican Communion to take the steps necessary to implement this Constitution.”

Bishop Moyer added, “All present realised that the requirement for the days ahead is patience, charity, and openness to the Holy Spirit.”

Though the Apostolic Constitution is not yet available, Cardinal William Joseph Levada, Prefect of the Congregation of the Doctrine for the Faith announced on Oct. 31 that it will be ready “by the end of the first week of November.”

Report from the Christian Telegraph