Thursday, June 30, 2016

Company tax cuts built on uncertain foundations

Claims of a boost to living standards from the government's planned company tax cuts rest largely on a dramatic reduction in tax avoidance, a new analysis shows.

Modelling by Canberra economist Chris Murphy for the federal Treasury finds the tax cuts would boost long-run living standards by around $5.2 billion per year, or half of one per cent.

But the bulk of the increase, $3.9 billion, would come from reduced profit-shifting.

The $3.9 billion figure is large compared with estimates of total profit-shifting. In June, an estimate by the charity Oxfam put the total tax Australia lost to profit-shifting in 2014 at between $5 billion and $6 billion. The estimates aren't directly comparable because the $3.9 billion includes the cost of setting up in a tax haven as well as the amount lost to the tax office.

"The $3.9 billion estimate is important because it means most of the benefits from cutting company tax wouldn't come from jobs and growth," said Victoria University economic modeller Janine Dixon. "They would come from the changed use of tax jurisdictions."

"And while the economics of how investment and wages respond to a tax rates is fairly clear, the economics of how tax avoidance responds is more speculative."

Mr Murphy assumed that for every one dollar the company tax rate fell, the cost to the economy from profit shifting would fall 73 cents. He based the assumption on studies of profit-shifting in the European Union.

Dr Dixon said while the European studies might be the best available, that didn't mean they would necessarily apply to Australia.

Without the $3.9 billion gain from reduced profit-shifting, the company tax cuts would boost national income by just $1.3 billion, a barely perceptible gain of 0.1 per cent.

The estimate of a $5.2 billion gain to national income assumed the company tax cut was funded by a lump-sum tax on households. If it was instead funded by bracket creep, living standards would increase by only $4.5 billion, just $0.6 billion more than the cut in profit-shifting. If it was funded by a cut in government spending the boost would be $8.7 billion. But a Treasury paper released with Mr Murphy's paper warned such a cut would not be easy.

Mr Murphy said the main benefit of the company cuts would be that they were self-funding, "to a much greater degree than cuts to other major taxes such as personal income tax or GST".

In The Age and Sydney Morning Herald