Firday, February 16, 2018 

SPIRO PREMITIS                

Five of ABC economics correspondent Emma Alberici's myths about corporate tax thoroughly debunked

ABC chief economics correspondent Emma Alberici is at it again. After overlooking the economic analysis of sugar taxes released by the Menzies Research Centre (spoiler: they are bad economics) last month, this week she turned her attention to arguments against company tax cuts.

 

The most egregious element of the story was the claim that "one in five of our biggest companies haven't paid any corporate tax at all in the past three years". As pointed out by the AFR’s Joe Aston this morning: “Company tax is paid on profits, so when companies make losses instead of profits, they don't pay it. Amazing, huh? And since 1989, the tax system has allowed losses in previous years to be carried forward – thus companies pay tax on the rolling average of their profits and losses. This is stuff you learn in high school. Except, obviously, if your dream by then was to join the socialist collective at Ultimo, to be a superstar in the cafes of Haberfield.”

 

The ABC has since removed the story from its website, saying it did not meet ABC standards. But Ashton's assertions are just the tip of the iceberg. Below are five realities glossed over in Alberici’s "analysis".

Myth 1: “Business investment in Australia has been at historically high levels over much of the past decade despite our comparatively high headline corporate tax rate.”

Reality 1: Business investment as a per cent of GDP is at very low levels, well below the peak during the mining boom. Have a look for yourself (right).

 

Myth 2: “Canada cut its corporate tax rate from 42.4 per cent in 2000 to about 26 per cent in 2011 where it has remained. In 2000, Australia cut its corporate tax rate from 34 per cent to its present 30 per cent. Business investment rose in both countries during the mining boom, but it rose more in Australia despite a corporate tax rate that's four percentage points higher than Canada's.”

Reality 2: Australia’s endowment of commodities was better positioned to take advantage of the China demand driven resources boom. This is evident by looking at our terms of trade compared to Canada’s. That is, the mining boom was bigger in Australia and hence the investment in Australia was bigger in Australia relative to Canada. Saul Eslake, who is referenced with respect to this point, appears to have overlooked this point – although no alternative view is presented on this point. If you are sceptical, here is a chart from the RBA.

 

Myth 3: “According to other Treasury-commissioned modelling, if the rate is lowered from 30 per cent to 25 per cent then gross domestic product will double by September 2038 as opposed to December 2038 without the cut. Both models predict that in 20 years' time the unemployment rate will be 5 per cent regardless of whether we spend $65 billion on company tax cuts or not.”

Reality 3: This reveals a significant lack of understanding from a "Chief Economics Correspondent". Alberici has misinterpreted the implications of the modelling. Rather than looking at the time it would take for GDP to double, she should realise that in fact GDP increases by a full percentage point for the whole period. This is a significant change that would lead to benefits for all Australians. 

This OECD study lets you compare a range of reforms in OECD countries. It’s not perfect but it illustrates something very important.

This graph (right) shows that the most common structural reforms available to OECD countries lead to 0.1-1.2 per cent improvement in GDP per capita over 10 years. There is no such thing as an economic reform that will double GDP overnight for an advanced economy. Alberici's analysis is conceptually flawed.

Myth 4: The Government agrees with an Oxford University study that "puts Australia's effective average tax rate at 26.6 per cent and at the higher end of the scale. Several analysts consulted by the ABC disagree."

Reality 4: Economist Michael Potter discussed this very point only the

day before in the AFR, saying a competing study by the US Congressional Budget Office uses out-of-date data and is not representative of all Australian corporate taxpayers: “Allegations of widespread corporate tax avoidance are also used as an argument against company tax reductions. However, this is not a widespread problem as company tax payments in Australia as a share of the economy are about third highest in the OECD.

This is confirmed by other measures of tax paid as a proportion of profits, known as effective tax rates. Data from the US Tax Foundation for 2014, and from the Oxford University for 2017, find Australia's effective company tax rate is well above the average; and these figures don't include actual or planned tax cuts in the US, France, the United Kingdom, Norway or Japan, which will make Australia even further above the average.

It has been argued that research by the US Congressional Budget Office shows the effective tax rate on companies is low in Australia. However, that research uses out-of-date data and covers only the taxation of investments into Australia by US companies, excluding investment into Australia by US pension funds, US individuals, and any non-US investors. It therefore provides a particularly unrepresentative view of the effective tax rate on Australian companies."

Myth 5: “Treasury modelling relies on theories that belie the reality that’s playing out around the world.”

Reality 5: Here is what KPMG had to say in 2016: “The available models can be divided into two groups: ‘mainstream’ and ‘outliers’. KPMG and Treasuy’s models fall within the mainstream economic thinking of the likely benefits of a reduction in the corporate tax rate, along with many others. There are a number of 'outlier models' which are based on assumptions which are generally not accepted in the mainstream economic community. These should be recognised for what they are: outliers. They should not be relied upon to the exclusion of mainstream economic modelling. That is, not all models are equal.”

KPMG and Treasury are experts in economic modelling, and employed the similar modelling techniques and assumptions when working on the carbon tax – but apparently now these models don’t hold water.

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