No free lunch on company tax

How refreshing it is that economists appear capable of having a debate about company tax rate cuts without resorting to political hyperbole. Well, almost. While alleging my analysis involves "nosedives" and "conspiracies", the government's preferred modeller, Chris Murphy at least traversed the theoretical economic arguments surrounding a cut in the company tax rate and acknowledges that I did too.

We differ in our conclusions mainly because Murphy's model looks at the world only in the long run – about 2035 – and assumes away all costs incurred along the way. Even then, Murphy concedes that if the company tax rate cut is financed by bracket creep his estimated annual gain in the mid-2030s is about $150 per Australian, together with a small loss in overall employment.

Murphy's result is reminiscent of Amanda Vanstone's famous description of the Howard government's 2003 income tax cut of $5 a week as being only enough to buy "a sandwich and a milkshake" – but from 2035 onwards.

The Turnbull government claims workers would be big winners from the proposed company tax rate cut. Yet Murphy estimates that Australian workers would receive a one-off increase in their after-tax wages of less than 0.3 per cent. For a worker earning $1200 per week, that's a wage rise of $35 a week 17 years from now.

In having nothing to say about the period between the date of the company tax rate cut and 2035, Murphy's model ignores the taxpayer-funded windfall gain to multinational corporations on the income they continue to earn from their past investments made at the 30 per cent rate.

Dr Janine Dixon, at Victoria University's Centre of Policy Studies, estimates this cost to Australia of this multinationals' windfall gain on legacy investments at $4.5 billion per annum initially, based on today's investment levels, and $30 billion cumulatively.

The Turnbull government says this is paid for in its budget decisions. Just two of the ways it is paying for its gift to multinationals are: cutbacks to school funding, including to genuinely needy schools; and the termination of the demand-driven system of university funding that has allowed many more schoolchildren from disadvantaged families to go to university.

Imagine if the Murphy model were used to evaluate ordinary investment proposals – not that it was designed for this purpose. By their nature, investments involve spending money in the early years in the hope of making more money later to recover the investment and achieve a profit on top. But if you were able to ignore all the costs of the investment, just about every project under the sun would be a winner.

Even in the long run, Murphy readily acknowledges that the company tax cut would not in any way be self-financing. He estimates the ongoing budgetary impact of a company tax rate cut from 30 per cent to 25 per cent at around $5 billion per annum.

To fill this continuing funding hole, Murphy suggests, as an alternative to bracket creep, a financial services rent tax at the rate of 8 per cent that is not deductible for company tax purposes. This non-deductible rent tax would replace the existing bank levy. What would the big four banks and Macquarie think about shelling out an extra $5 billion a year?

Murphy's economic logic has a basis in theory: lightly tax capital and labour, which are internationally mobile factors of production, and instead tax immobile resource rents and oligopoly rents.

Yet when the previous Labor government sought to introduce a resource rent tax and use part of the proceeds to fund a small cut in the company tax rate, the Minerals Council went ballistic and the BCA vehemently opposed the trade-off.

Again, this time around, in defiance of Milton Friedman's dictum that there's no such thing as a free lunch, the BCA has picked out for support the one recommendation of Murphy and the Henry Review it likes – a cut in the company tax rate.

The Turnbull government appears to have persuaded all but one of the cross benchers it would need to pass the bill. Senator Storer is right to oppose a cut in the company tax rate with no wider reform of the company tax base and of the tax system as a whole.

The BCA and the government would be far better off engaging with both the government and the opposition on a more comprehensive approach to reforming company tax. But that free lunch always looks so appealing.