Tax cuts the sugar hit for our overweight economy

On the agenda in Australian politics since 2016 when Malcolm Turnbull was re-elected have been these corporate tax cuts. The current tax rate for corporations in Australia is 30%. The suggested cuts would bring that down to 25%. The idea being that it would stimulate investment, particularly foreign investment. Australia is being “left behind” from other countries who are “more attractive” to invest in, or have company headquarters in. The argument makes sense in a vacuum, just like choosing a hit of sugar over a grain bar does if you need instant energy.

Long term it is not better for anyone except big business. And the question is – are they they ones missing out in this changing economy? Is the goal of populist movements creating chaos in foreign politics to make life easier for big business? The opposite.  People feel like they are getting screwed, like the playing field is unfair. Tilted towards the elites. And yet in Australia, to keep destructive populism at bay, and the economy going, the big proposal is to make Australia more like other countries that are going through incredible upheaval. “Trump did it” and of course, any decision he makes is obviously worth following. Surely this is not the best we can do.

We want a financially healthy country, and a healthy world economy. Currently we have an overweight economy with housing and mining propping it up. In this complicated global world, everything is a competition. Manufacturing is dying because it’s cheaper to do in China. Retail is dying because ASOS is cheaper than Myer. And on and on. This is all made easier and more likely by free-trade, championed by both major parties, but particularly by the right wing.

Part of the reason it’s cheaper to do business in other countries is because the labor is cheaper. But another part (supposedly) of why a company would do business somewhere else is because of the tax rate they pay. We see this most clearly in Europe, where there is a free market within the EU but the tax rates vary wildly. This leads to some countries benefiting more than others. Ireland decided to become the “low tax” place, and as a result a lot of the tech company’s “headquarters” are there. But when is the last time you heard about Ireland’s economy killing it?

Ireland is still struggling. The smart people are leaving. The main staffs of tech companies are not in Ireland because Ireland is not London or Paris, and high skilled workers can afford to choose where they live. The “benefit” of tax arrangements mainly allow companies to funnel their money through Ireland for a marginal benefit to Ireland. Tax competition get’s Ireland tax revenue (although it’s still low because the tax rate is so low) but not that many jobs, or that much flow on stimulants to the economy. It also decreases the entire ability of the EU to benefit from all the profit companies are making from their citizens. It’s a slight gain to Ireland (a place where people are still leaving), for a net loss to everyone else.

This is how the tax competition works. You can see why big business pushes this idea of “missing out”, and countries (and states, and cities) needing to be “tax competitive”. Big business are the big winners from a global competition to lower tax rates and play governments off against each other. So the deeper question to tax cut is not about whether they will have the intended effect (this is questionable, at best maybe a sugar hit), but rather – do we agree with the rules of this game?

Is governments role to compete to win over corporations that are driven by profit objectives? Because if that is the goal, then ultimately the argument should not be able tax cuts, but about shifting the power to corporations – the government wants big corporations to define the rules of the game, that is the big picture of lower taxes. Here we all were thinking that democracy was about government setting the agenda. In the tax competition game shareholders are more important than citizens. Yet that is not the discussion.

So if we cut, and get some of that investment, and then others cut and it goes away. I think we all know what the government will say in response to that – “we need to cut corporate taxes to be competitive”. It won’t end. Therefore the argument should not be about cutting corporate taxes, but about what is an effective tax rate that we should be working towards. Why is cutting it by 5% beneficial? What is the ideal number that both stimulates innovation but also ensures businesses play fairly and treat employees and the society in which they profit from well. These discussions are unfortunately not being had.

Of course, the worst thing about black and white “tax cuts” conversations is that the fundamentals of successful economies are not being discussed. Australia (or anywhere) will be successful if they develop a skilled workforce that produces output that society values well. It will be successful if the best people want to stay here, and not (like Ireland) want to leave. California is one of the highest taxed placed in the US, but everyone in tech and entertainment is there. New York is the same and everyone in finance is there. Value based economies are more sustainable than competition based ones. Productive economies are better than ones with cash flowing through them (do you want to live in the Cayman Islands?). High taxing Nordic countries are hardly struggling, they are innovative and happier than other places. They are providing value to their citizens.

People want to live in exciting places with good transport good services and young people who drive culture. People are leaving Sydney because it has less of that. Business want’s tax cuts whilst at the same time saying they will leave if the infrastructure does not get better. $65 billion would pay for a few projects, wouldn’t it? Maybe we can kill two birds with zero stones.

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