Why a company tax cut may not work

Tuesday, 24 April 2018  Media Alerts

Flawed modelling may be behind suggestions a tax cut for companies would boost the economy, says Professor Peter Swan from the UNSW Business School. He spoke to the Senate Economics References Committee at its hearing in Sydney today.

Proponents of the corporate tax cut ahead of the Federal Budget 2018 argue it will make Australia a more attractive place for foreign investors and the extra capital coming in from offshore will raise real wages and increase economic growth.

However, Professor Swan says this view presupposes that foreign marginal investors pay the headline tax rate and thus are unable to time their trades with Australians to gain full value from recycling franking credits. 

Marginal investors are defined as those who are most likely to either withdraw or increase their investment if returns change and consequently are the investors who 'set' the price of an investment in a market.

Thus, the pro-tax cut argument goes, if foreign investors pay less tax on the returns from their Australian assets, they will invest more.  But Swan's research implies that, even before the tax cuts, they are not paying tax. 

"The government has estimated that it will collect $65 billion less in revenue because of tax cuts over the next 10 years. These tax cuts are unlikely to add significantly to investment since investment is already at its maximal and efficient level.  How then are we going to suddenly become richer? It just doesn't make any sense," Swan says.

"It will cost everyone in Australia approximately $2500. Where is the case to show that higher investment, even in the unlikely event that it was to eventuate, would yield a gain of this magnitude, even in the longer term?"

Read more of the analysis from UNSW Business School: https://www.businessthink.unsw.edu.au/Pages/Sorry-Treasurer-but-your-corporate-tax-sums-are-not-adding-up.aspx

For further comment contact Peter Swan on 02 9385 5871 or peter.swan@unsw.edu.au

Media contact: Julian Lorkin: 02 9385 9887 

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