“When profits go up, so do wages,” Business Council of Australian president Grant King declared last week as he struggled to keep alive the dream of a tax cut for his members. It would be equally simplistic but a bit closer to the truth at present to turn the statement around: When wages go up, so do profits.
The reality is that higher profits aren’t translating into higher wages. Higher wages are something every employer wants for all workers bar his or her own. While labour is readily available, there’s no reason to pay more for it and businesses generally don’t. The old, closed-system theoretical models hand-cranked by Treasury and parroted by the government and BCA are of limited use.
The government’s only apparent plan for economic stimulus – corporate tax cuts – looks lonelier by the day. Sliding away in the polls, embarrassed by the WA election, locked into inaction by internal politics and with another budget looming, the idea of giving foreign companies a present isn’t generating wild enthusiasm. The latest Essential poll hot off the telephones finds only 24 per cent of voters supporting the idea, down from 28 per cent last month.
No wonder the BCA feels the need to champion it. The large foreign-owned members of the council – many of them accomplished tax avoiders – are the only significant beneficiaries of the policy. Australia’s dividend imputation system means the eventual wash through of a lower company tax rate makes little difference. For the majority of enterprises – small and very often unincorporated – it’s nothing.
And it’s no wonder that public support for corporate tax cuts as presented by the government and BCA is weakening. It reflects the weakness of the two key prongs of the BCA’s argument, as presented by Scott Morrison and Grant King.
First of all, the BCA would have us believe there is an international shortage of capital, that there is a war for it, that it is being rationed and Australia will not get any unless we tax foreign companies less.
The reality is that there is no shortage of capital – the world is awash with money looking for investment opportunities. There is so much capital sloshing around that several trillion dollars are sitting in government bonds with negative yields, guaranteed to lose money held to maturity.
What there is a shortage of is investment opportunities offering both security and opportunity. Security and opportunity happen to be things that Australia has plenty of. Throw in a relatively well-educated and adaptable workforce, a growing multicultural population, handy geography and rich natural resources and it’s why foreign money keeps pouring into this country. “Australia is seen as safe haven for investors” as international institutions compete for our commercial buildings, never mind the very real war bidding up the value of any infrastructure we care to put up for sale.
At the individual level, Australia has topped the league for millionaires migration for the second year in a row. More millionaires have moved to Australia than to any other nation. Our tax rates don’t seem to be a problem for them.
That’s in keeping with Warren Buffett’s 2011 declaration: “I have worked with investors for 60 years and I have yet to see anyone – not even when capital gains rates were 39.9 per cent in 1976-77 – shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.
He was writing about the US, but the failure of trickle-down economics there in an age of increasing inequality remains a lesson for all except, it seems, the doctrinaire hard right, those for whom the Galbraith quote applies: “The modern conservative is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”
Secondly, the BCA and government keep trotting out dubious Treasury economic modelling that claims more than half the corporate tax burden is borne by workers through lower wages. The modelling has been effectively debunked but a lobbyist hears what he wants to hear and disregards the rest.
The economic theory only works in times of full employment and a closed system – not when there is excess labour in a globalised economy. Our underemployment rate and the ability of much work to flow to where it can most cheaply be done means the perfect world of such computer models is out of date. An individual’s ability to gain a wage rise is entirely dependent on the likelihood of being offered a higher wage by someone else – and that’s not happening in most Australian industries.
Forget the model and check the real world. The scorecard for the ASX 200 companies in February reporting season showed, yet again, that most companies increased profits and increased dividend payments. You have to go back to GFC-hit 2008 to find a period when a majority of companies reported lower profits – and that was after years of extraordinary boom. What’s been the flow through to wages from those higher profits? Not much at all.
From a broader perspective, Australian wages have been losing out to profits for decades. As Paul Malone reported, the share of national income flowing to employees dropped from 62.7 per cent in the mid-1970s to 52.3 per cent in the latest December quarter. Over the same period, the share going to profits rose steadily from 16.5 per cent to 26.5 per cent.
So the one about business wanting to increase wages if only tax was lower remains a joke, though not a funny one. The polls tell us the average Australian can see through the shabby arguments.
That said, yes, our tax rates need to be reasonably competitive, weighted for the extra security and opportunity we offer. We don’t have to keep up with nations effectively trying to bribe foreign corporations to invest, but it also wouldn’t be wise to be too far out of whack.
If the BCA and the Coalition were serious about the need to maintain our competitiveness, they would be looking for reasonable ways to pay for a reduction in headline rates, rather than just hacking $50 billion from government revenue for a negligible and distant promised benefit.
The BCA would be better served investigating what loopholes, rorts and deductions should be axed as a trade-off for lower rates, finding ways to ensure BCA members actually pay tax on the money they earn in Australia, rather than churning out trashed platitudes.
Build up some credibility in overall tax policy – buy into the negative-gearing/CGT interaction, for example, or denounce the novated lease rort – and come up with a plan that makes sense to the Australian people, that is equitable and in the nation’s best interests and then we could well be interested. Until then, forget it.
First published SMH March 15, 2017