February 17, 2017

Horse 2229 - Company Tax Is Fine, Provided We're Not Paying

Talkback radio and in particular AM talkback radio, seems to me to be the echo chamber for older people who do not like the internet. Probably because commercial radio is by definition commercial, it means that the people who are put on it and the opinions expressed are more likely to be to the right of the economic spectrum. That is, that business should be allowed to do whatever business does and everyone else should put up and shut up. The market giveth and the market taketh away, amen and praise be.

Earlier in the week I was listening to Jennifer Westacott from the Business Council Of Australia and she was again putting forward the opinion that the opposition must absolutely the government's omnibus bill and that the government must immediately look into lowering the rate of Company Tax because that will attract more investment and create jobs. Failure to do so would result in the end of days, apparently.

It wasn't as if this was anything new from Jennifer Westacott either. We pretty much heard the same story back in December last year in one of the Business Council's press releases.

At an absolute minimum, the Senate must pass the government’s company tax plan in full. This will send a strong signal to investors that Parliament is serious about Australia’s international competitiveness.
- Business Council of Australia, 7th Dec 2016

I really wonder about that that phrase, "international competitiveness". To me it sounds like a euphemism for lowering wages and conditions?
This is also from that same press release from the BCA:

Parliament must support the government in taking urgent action to drive new investment and create better jobs with higher wages. This includes embracing more flexible workplaces, lowering business taxes, getting the budget under control, bringing energy costs down and fixing the planning system to spur investment through major projects.
- Business Council of Australia, 7th Dec 2016

Is the BCA saying that lowering company tax would really "create better jobs with higher wages"? That's not what I've heard elsewhere in the grand debate about taxation and wages:

Ms Westacott is unhappy with the current enterprise agreement system.
"There are too many things outside the core wages and conditions that can be negotiated, things like training [and] rosters," she said.
- ABC News, 5th Mar 2016.

The argument that Ms Westacott specifcally put forward with regards the Company Tax plan which is before the parliament, is that a higher rate of Company Tax acts as a disincentive to working harder. I have heard this claim on many occasions and not once has it ever been proven with empirical evidence. It's like yelling "this is a theory" and expecting everyone else in the world to say "well done, we believe everything you say without question".

The thing about Company Tax as opposed to personal Income Tax is that instead of progressively higher marginal rates of taxation, Company Tax is a constant 30% which is imposed on every dollar of profit. The argument about progressive taxation being a disincentive to working harder, is functionally irrelevant when talking about Company Tax because the rate of tax payable on the first, second, millionth, billionth or even godzillionth dollar is identical. Is always exactly the same - 30%.

If we assume for a minute that lowering the rate of Company Tax, say to 0%, is going to herald some new wave of job creation then I don't think that Business Council's assertion necessarily holds. For companies such as General Motors and Ford, who had for many years had an effective rate of Company Tax of less than 0% because of direct government subsidy payments, that still wasn't enough to keep them in Australia. Likewise, companies like Woolworths or Coles, are just as likely to pocket the difference between their old effective rate of taxation and  their new one, and spend some of that on even more automated services. When the banks had the opportunity to axe tellers en masse and replace them with Automatic Teller Machines, they jumped at the chance.

Besides which, given that the largest ten companies by market capitalisation as listed on the ASX are four banks, three mining companies, two supermarket chains and a telco, who have all found ways to replace people with machines, just real world evidence would suggest that the Business Council Of Australia's assertion that lowering the Company Tax rate is going to create more jobs, is repeatably and demonstrably complete and utter rubbish.

Company Tax is calculated on a post profits basis. Labour like every other normal expense is included before Company Tax is calculated. The  thing is that the stated amount which is declared by the owners of most small businesses as their own wages, is something of a juggling act because wages which are included as a business expense usually have PAYG taken out before they receive them and as dividends are usually paid out of post taxed profit, then the mix of payout of wages and dividends is going to be nebulous depending on taxation policy. A simple reduction in the headline rate of Company Tax doesn't of itself mean that even a single dollar for is going to be used to employ an extra employee for that reason. All that happens in the short term is that most small businesses start juggling figures again until they come up with a new position where they can pay the owners more money at the lowest cost.

If this is solely about job creation, then to employ on person on $20/hr on a part time basis, for 20 hours a week, then the amount of Company Tax that needs to be saved is $20,800. Assuming that Company Tax is done away with altogether, then this particular company would have already posted profits of $69,334 and to be fair if they weren't going to employ someone specifically because of the imposition of Company Tax, then its reduction or removal entirely ain't going to make a lick of difference.

Besides which, one of the reasons why we have a higher rate of Company Tax in Australia as compared with other countries in the OECD is that we have a franking credit system where dividends are paid out of post tax profits. That means to say that the shareholders of companies who are entitled to the rewards of ownership of those companies, have dividends paid to them with the tax already taken out. For most people the net effect of that in their personal is exactly nil.

A dividend with a prepaid 30% franking credit, when added to their existing income is taxed at that same rate of 30%. For people at the lower end of the income scale, they receive some of those credits back because their personal marginal rate of taxation is less than 30%. For people in the upper tax brackets, you can hardly say that those higher rates of taxation are a disincentive when they're receiving dividends because dividends as the reward for owning part of a company, are with the exception of small owner/operator businesses, the result of other people's work. That being the case, I don't know how you can claim that a higher rate of Company Tax acts as a disincentive to working harder when you're not the one who is actually working.

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