Election 2016: The False Choice Between Growth and Fairness

Putting aside the political trivia of which party's candidate said what to whom and when in departing from official policy, the first week of the election campaign was dominated by arguments over growth versus fairness. Purportedly, the respective vehicles of growth and fairness are the Coalition's company tax rate cut and Labor's needs-based school funding. It's a false dichotomy.

Advocates of a company tax rate cut assert that it will more than pay for itself in revenue from increased growth. Most economic modelling of its effects is comparative static by nature – a snapshot of some time in the future compared with the present. Broadly, this modelling suggests gross domestic product (GDP) could be 1 per cent greater in the future. That's not 1 per cent a year, which would be huge. It's 1 per cent in around two decades from now – an average of 0.05 per cent a year in growth – which is tiny.

It means we could reach a particular level of GDP 20 years from now perhaps five months earlier than we otherwise would have done. Moreover, GDP is the wrong measure of the impact on the incomes of Australians, since it includes the benefits accruing to foreigners. The correct measure is the effect on gross national income (GNI). By this measure, the results of different models range from a net loss to a small gain.

The problem with a company tax rate cut is that it confers a windfall gain on foreign investors in respect of all the future income from pre-existing investments that were made at the 30 per cent rate. It also provides a windfall gain to foreigners on all future profits from investments they would have made at the 30 per cent rate.

The only potential sources of gain for Australia are the tax collected on any extra foreign investment that comes into the country owing to the 5 per cent reduction in the company tax rate, together with wage rises from greater worker productivity. However, most of these wage rises would be paid by existing domestic businesses that would not benefit from a company tax rate reduction owing to the operation of the imputation system.


The argument used by advocates of a company tax rate cut is that Australia's 30 per cent rate is uncompetitive; that our rivals apply lower rates and are lowering them further. What's to say our competitors won't continue cutting their company tax rate in a race to attract footloose foreign investment away from each other and from Australia? Midway through any phased reduction in Australia's company tax rate from 30 per cent to 25 per cent, demands would be made to go further, in a race towards the bottom, until our company tax rate became negligible.

The stated purpose of a company tax rate cut is to attract foreign investment. When we seek to encourage research and development we apply an R&D tax concession not an across-the-board company tax rate cut. If we want to attract more foreign investment why not apply an investment allowance that, by its nature, does not confer a windfall gain to foreigners on their pre-existing investments? Interestingly, business lobbies have shown no interest in this proposal.

Opponents and sceptics of a company tax rate cut are not necessarily anti-growth, interested only in redistributing slices of the existing economic pie. Similarly, advocates of needs-based school funding, as proposed by businessman David Gonski, are not simply redistributors. In the digital age, investing in the talents of young people, including those struggling at school, will be fundamental to future economic growth as well as to equity.

Unfortunately, Australia's increasingly shaky hold on its AAA credit rating seems likely to necessitate a choice between a company tax rate cut and fully funding the Gonski reforms. The proposition that we should wait until a company tax rate cut eventually weaves the magic attributed to it and grows the economy sufficiently to enable the government to afford needs-based school funding is self-servingly absurd.

Australia could afford a company tax rate cut and the needs-based school funding reforms if the political parties would agree that the means tests for the age pension are overly generous and the effective tax-free threshold for self-funded retirees is unsustainably high. But retirees are a large and growing voting demographic so there's not much chance of that. Far easier, it seems, to book up the cost of maintaining today's living standards to future generations, who don't get a vote in this election.

Source: http://www.afr.com/opinion/columnists/elec...