Mining Kalgoorlie 070706 AFR pic by Erin Jonasson. men in steel capped mining boots on site in Kalgoorlie, generic mining pic hold for files. resources, mining boom, export of commodities. first use AFR please, DIGICAM 00067104The Americans’ decision to drop their company tax rate to 21 per cent from the start of next year is unlikely to overcome our Senate’s resistance to cutting our company tax rate to 25 per cent for big business. Which is no bad thing.
It seems the forces behind the US end of neoliberalism – the distortion of mainstream economics I prefer to call bizonomics (giving big business whatever it wants will be best for all of us) – aren’t giving up without a fight.
This US tax bill is a huge win for them, with the company tax rate greatly reduced, plus cuts in personal income tax biased heavily in favour of high-income earners.
To the extent the unthinking populism that helped elect a way-out character like Donald Trump has been provoked by economic factors, the obvious suspect is America’s growing inequality.
But Trump’s only great legislative achievement in his first year is an act that will worsen inequality.
That the populists have just shot themselves in the foot is no surprise, since the hallmark of populism is wanting to have your cake and eat it – failing to think things through.
Those American business people who aren’t populists, but like the sound of Trump’s tax cuts, also need to do some thinking through.
Their big problem is that the tax package will cost the US budget almost $2 trillion over 10 years.
Any consequent boost to US economic activity is likely to be short-lived, and any boost to tax collections far too small to much reduce the net cost to the budget, meaning a lot bigger deficits and debt.
The extra government borrowing needed to finance those bigger budget deficits – and to attract funds from foreign bondholders – will force up US interest rates and the US exchange rate. And, because the US is such a big part of the global economy (unlike us), also force up world interest rates.
Eventually, these higher rates will do what higher interest rates always do: discourage borrowing and spending, causing the US economy to slow.
The more so because it’s already been growing fairly strongly for some years, with unemployment already down near the rate thought to represent full employment. It hardly needs more fiscal (budget) stimulus.
The US Federal Reserve will worry more about rising inflation pressure, so will start raising its short-term, policy interest rate faster than it has been.
Neoliberals treat it as a self-evident truth that cutting tax rates leads to increased business investment, consumer spending and employment. But only the most oversimplified economic analysis tells you that’s guaranteed. In practice there are many other variables.
For instance, if they don’t see many profitable opportunities, US companies could keep doing what many have been: returning their (higher) after-tax profits to their shareholders as share buybacks, rather than investing them in business expansion.
However, Trump seems to have guarded against this possibility by including in his package a temporary business investment incentive.
So my guess is that, as well as giving share prices a boost, his tax cuts will lead to some increase in “jobs and growth” – at least for a while.
Now turn back to Oz and whether cutting the US company tax rate to 21 per cent leaves us with no choice but to cut ours to 25 per cent so as to be “competitive”, as the government and the Business Council claim.
The big complication in applying analysis from other countries to us is our full dividend imputation system, which means n shareholders pay no company tax on their dividends. They thus have little to gain from a cut in the company rate.
This means the cuts we have passed, for companies with annual turnover of less than $50 million a year, probably won’t do much to change the behaviour of those companies, since most of their owner shareholders would be locals.
It also means cutting our company tax rate yields benefits only to the foreign shareholders in our companies.
Why would we do such a thing? Especially when our 80 per cent foreign-owned mining industry employs few people, and the company tax it pays (or avoids paying) constitutes a key part of our reward for letting foreigners exploit our natural resources.
The standard answer is that cutting our tax rate would attract more foreign capital, which would generate more Jobs and Growth. The government’s own modelling, however, found that the extra jobs would be negligible, while the extra growth would be quite small, and spread over 10 or 20 years.
Now, however, the argument changes: with the Yanks cutting their rate so low, we’re in danger of losing our inflow of foreign investment funds. So cutting now wouldn’t make us better off, but would avoid us becoming worse off.
Worried? I’m not. This argument assumes the size of the nominal rate of tax a country imposes on foreign investors is pretty much the only factor they consider when deciding where in the world to invest.
This is just silly. For a start, it ignores all the special tax breaks countries offer. A US study has found that our effective rate of tax is much lower than our nominal rate of 30 per cent, and compares well with other countries.
In any case, investing in Oz has a lot of non-tax attractions: our huge endowment of natural resources, our lawfulness and respect for property rights, our rich and well-educated workforce, our English language, our good education system, our good weather and even our good beaches.
So far, we’ve had no trouble attracting lots of foreign investment, despite our seemingly high company tax rate.
We’d be mugs to start panicking and giving up a lot of tax revenue – and adding to the debt and deficit we used to say was so terrible – before there was any evidence we had a problem.