Morrison’s Plan B 'trickle down' tax cuts

Prime Minister Scott Morrison and Treasurer Josh Frydenberg championed the tax cuts on the basis that they “will mean more investment, more jobs and higher wages”.

After its embarrassing failure to win either popular or Senate crossbench support for its proposed big business tax cuts, the Coalition government has instead opted to bring forward tax cuts for small and medium businesses by five years.

Having already passed legislation to phase in a reduction of corporate tax rates from 30% to 25% by 2026-27 for businesses with a turnover of less than $50 million, the government tried to pass legislation to extend the cuts to all companies. In a period of rising corporate profits and stagnating wages adding to existing inequality, the sheer inequity of this policy made it hard to sell.

It became even harder to sell as the biggest beneficiaries of the tax cuts were put under the spotlight of the banking royal commission, which revealed their habitual bending and breaking of the law and ethical standards to feed their already huge profits. Crossbenchers who voted for the previous tax cuts baulked and the policy was shelved in the hope of staving off electoral damage.

The new tax policy announced on October 11, which will see the tax cuts come in by 2021-22, is the government’s Plan B. The estimated cost of the tax cuts to government coffers is $3.2 billion.

The government was hoping it might prove more palatable to the crossbench and to the electorate, with an eye on running an election campaign condemning Labor as the party of higher taxes.

Having abandoned its commitment to repeal the existing business tax cuts, Labor initially reserved judgement on the new tax policy. But on October 12, Labor leader Bill Shorten capitulated, saying: “We’re prepared to compromise in the national interest.”

While the government's new tax policy might benefit some businesses that earn livelihoods only in the same league as ordinary workers, it extends to medium businesses with a turnover of $50 million a year. To an average person, there’s nothing "medium" about $50 million.

The government has also raised the turnover threshold of a small business from $2 million to $10 million, which also challenges the average person’s concept of “small”.

Business has already been doing very well in recent years. Commsec reported profits from the most recent full-year reporting season as being up by 8.4%, with dividends up by 13.6%.

At the same time we have seen historic low wage growth. Median household income has been almost unchanged since 2009.

The longer-term trend has seen the wage share of GDP drop from 58.4% in 1975 to 47.1%.

For the unemployed, Newstart allowance has not risen in real terms since 1994. Over the same period the economy has grown by about 50%. The unemployment rate is 5.3%, having hovered within a band of 1.5% since the 2008 Global Financial Crisis.

Prime Minister Scott Morrison and Treasurer Josh Frydenberg championed the tax cuts on the basis that they “will mean more investment, more jobs and higher wages”.

It is undoubtedly correct to say that if businesses are given more money they can invest more, employ more people and lift wages. However, it is one thing to say they can do so; it is another thing to claim that they will do so.

Even within the confines of neoclassical economic theory, on which the government relies, companies always seek to maximise profits. So the idea that if you give them more money they will want to give it away to their workers does not automatically follow.

But, given that the government is championing this policy on the basis that it will lift wages, we should expect that next time unions are campaigning for wage rises the government will be standing with them to make sure that the stated goals of their policy come to fruition. In fact, given that the business tax cuts started phasing in from the 2015-16 financial year, you might have expected to see this already happening.

Instead, we have seen the government cut penalty rates and regularly condemn or threaten to deregister unions.

Either the government’s campaign for wage rises is yet to come or it is being disingenuous about the real goals of its policies.

When businesses are given more money, investing, employing more staff and lifting wages are just some of a range of things they can do with it. An obvious alternative is to simply save it. Another is to spend it on luxuries.

Even if businesses do chose to invest the money, it may be in speculative rather than productive investment.

Investing in stocks or derivatives is one option. The growth of the stock market since the GFC attests that much of the growing profits from recent years have ended up there.

Likewise, the disproportionate growth of the property market attests to the fact that much of those growing profits have gone into buying investment properties, pushing home ownership further out of the reach of average income earners.

These speculative investments merely go to rising asset prices; they do not create jobs or lift wages, save those of a few stockbrokers and real estate agents.

Even when businesses use extra money for productive investment, it does not necessarily go into wage rises or job creation. Increased investment can be used to employ more staff. It can also be used to help re-equip businesses and allow them to reduce staff.

In a stark example, the NAB announced a record net profit of $5.3 billion in November. At the same time, it announced its intention to reduce its workforce and eliminate 6000 jobs.

If productive investments do create jobs, they will not necessarily be in Australia, as opposed to, say, Bangladesh.

If businesses are finding Australia’s 30% company tax rate too much, they need not settle for 25% either: channelling investments through shelf companies in tax havens like the Cayman Islands can bring it down to zero.

Business has already been getting larger profits and a bigger share of the economy, yet the extra money going to business has not resulted in higher wages or lower unemployment. So the idea that giving them even more money will have that result is obviously fanciful.

On the other hand, if the government were to give it to people such as Newstart recipients or low-paid workers, the outcomes would be different.

Not only would it help redress inequality, we could be sure that very little of it would find its way to the Cayman Islands, into speculation on investment properties, or into stock and derivatives markets. We could be quite confident that it would be going to buy goods and services, and employing the people who make them.