The race is on. With his usual flourish, US President Donald Trump rekindled the love with his Wall Street fans earlier this month with a bold proclamation — corporate taxes would be slashed as promised during his campaign a year ago.
The golden locked leader drew “very much a red line” under a 20 per cent top corporate tax rate from the current 35 per cent.
It wasn’t the first red line he’s drawn in recent months and, for budgetary reasons, this red line appears to have shifted from the 15 per cent promise he made while on the hustings.
The announcement sent our own federal pollies into a lather and this week the question again will be hammered out in Parliament as to whether our company tax rate should be cut from the current 30 per cent to 25 per cent.
If you believe the hype, without the proposed cut, Australia will become an economic backwater, capital will flood to rival economies with lower tax rates and any multinational looking to invest will simply look elsewhere.
If only it were that simple.
The problem is that comparing top line corporate tax rates is an exercise not so much in simplicity, but duplicity.
There are so many variations unique to each jurisdiction that comparing the statutory rate alone is all but meaningless.
Where do we sit in the corporate tax stakes?
If you believe the spin from some quarters, Australia charges like a wounded bull when it comes to corporate tax.
The statistics, however, tell a different story.
The US Government’s Congressional Budget Office has compiled this handy comparative study of global corporate tax rates.
How Australia’s corporate tax rate compares to others around the world.
(Supplied: US Congressional Budget Office)
What it reveals is that Australia is either the global Goldilocks of corporate tax (not too hot, not too cold) or extraordinarily generous to big business, depending on how you measure it.
While the study is current, the numbers have changed in recent years. Both Japan and Germany have lowered their top-line taxes to around the same level as ours.
But it remains a useful study if only because it highlights the differences in the way tax rates can be measured.
It may get all the headlines, and it will be the only measure batted out in Parliament this week, but the top-line tax rate is just one way of measuring corporate tax rates.
Because of various tax concessions or imposts in different countries, the average tax rate is often a better measure.
And for companies considering investment decisions, the best way to measure corporate tax is through comparing what’s known as effective tax rates.
Here is the real story. Our statutory rate may be 30 per cent, but even on that measure, we rank in the middle of the field.
Our average corporate tax rate, however, is just 17 per cent, and when it comes to effective corporate taxes, companies in Australia pay just 10.4 per cent.
The discrepancy relates to a range of things, including how quickly firms can write down or depreciate the value of their investments or where they have sourced their finance.
The hidden taxes
America’s headline rate may be 35 per cent. But, as you can see from the chart, the statutory tax rate is 39.1 per cent. That’s because American companies pay state taxes as well.
Then there are health costs, which aren’t included in that top-line figure.
It may be the richest nation on Earth, but America’s health system stinks.
So, companies wanting to hire good staff offer health insurance and medical benefits. It’s an attractive lure for employees who otherwise would have to sell the family home to pay for a brief stint in hospital.
In Australia, taxpayers and not corporations pick up the tab for the health system.
Australia’s hidden benefits
We have a unique — OK, New Zealand has it too — system of corporate tax that drastically lowers the amount of tax Australian investors pay.
It’s known as dividend imputation and it effectively lowers the company tax rate for local investors to almost zero.
Unlike other countries where companies pay tax and then shareholders pay tax on their dividends, Australia taxes just once.
Essentially, taxes paid by corporations are returned to shareholders via what’s known as franking credits, which are then used to reduce an individual’s tax bill.
But it’s a system that is limited to Australians. Offshore investors pay tax on their dividends as well.
For that reason, the benefits of any cut to the Australian corporate tax rate overwhelmingly will flow through to foreigners.
For Australians, it has almost no effect because cutting the company tax rate reduces the amount of franking credits they receive.
Will a lower statutory tax rate boost the economy?
The theory says yes and goes something like this: Less tax equals greater profits. And bigger profits means more money to invest, which should boost employment and help lift wages.
The trouble with theories is that they tend to not work as envisaged in the real world. And what we’ve seen in the past decade — with global interest rates cut to zero – doesn’t quite fit the model.
The idea behind those rate cuts, to zero and even into negative territory, was that corporations would borrow and invest, boost wages, fuel inflation and pick the global economy up off the mat.
Instead, most of the benefits of the tax cuts were passed directly onto shareholders who demanded bigger dividends in a world where there was no return on cash.
The investment dollars went into assets, such as shares and property, rather than production, as asset bubbles ballooned around the globe.
It’s highly likely the same thing will happen when corporate taxes are cut — the benefits will be distributed to shareholders rather than reinvested.
According to Treasury, the proposed Australian corporate tax cut should result in a 1.2 per cent lift in GDP over the long term.
But as the Grattan Institute’s John Daley and Brendan Coates point out, an increase in our economic activity doesn’t necessarily make Australians richer, particularly when the tax benefits flow disproportionately to foreigners.
Given those foreigners would have financed their Australian investments offshore, a large slice of the profits also would leave the country.
Even the Treasury concedes that our Gross National Income will rise by just 0.6 per cent in the long term.
The great multinational tax rort
Every couple of years, finance ministers and treasurers from the world’s 20 biggest economies get together and bemoan the fact that multi-nationals are ripping them off.
They commission studies from the Organisation for Economic Co-operation and Development to delve into the murky world of tax evasion and profit shifting.
When treasurer, Joe Hockey launched a stinging attack against multinationals when he hosted the G20 finance ministers here a few years back.
Tax avoidance was theft, he said. It was time to crack down.
As soon as they head home, however, they all begin jockeying to lower corporate taxes, often as a way to stop multi-nationals evading tax.
It’s an odd strategy. Charge less so you don’t lose as much through deceit.
As we’ve seen time and again, big corporations with the aid of the Big Four accounting firms, look for the lowest rate of tax globally, domicile themselves there, and shuffle their profits through those countries.
It’s not about investment and it certainly isn’t about creating jobs or growth.
Just last week, the Australian Tax Office estimated that last year alone, multinationals attempted to evade paying around $3.5 billion in tax, but the ATO managed to claw back around $1 billion through audits.
Still, we race to the bottom.