Friday, August 09, 2013

True. Treasury thinks cutting company tax helps workers

"Treasury believes if you reduce company tax, you increase pay, you increase GDP and you increase employment."

Tony Abbott, press conference Wednesday August 7

To hear Tony Abbott speak, you would think a cut in the company tax rate was good for workers. He is promising to cut the rate from 30 per cent to 28.5 per cent per cent in mid 2015.

“Go back and look at the papers that the government released as part of the Henry tax review,” he said on Wednesday. “And you will see that Treasury believes if you reduce company tax, you increase pay, you increase GDP and you increase employment”

Supporting evidence

The Treasury itself has been silent on the question. But at the 2011 business tax summit its former head Ken Henry left those present in no doubt about his toughts.

At issue was the “incidence” of company tax. Did it fall on the owners of the companies or on their workers.

“In the case of a relatively small, open economy like ours, there is simply no debate in the academic community,” he said. “There is a strong consensus among tax academics that the incidence of the tax falls predominantly on labour.”

It’s a hard proposition to get your head around. The argument is that businesses have a choice about where they invest. The lower Australia’s company tax rate, the more likely it is that they will invest here. Those arriving or staying will employ workers and spend money putting up buildings and buying equipment, each dollar of which will make the workers they do employ more valuable, and more worth paying higher wages to keep.

But does it stack up?

The studies cited in the the Henry tax report do find such an effect, but it is far from complete. In the short term a move in the company tax rate appears to move wages little. In the longer term a 10 per cent adjustment in the company tax rate appears to move wages 7 per cent.

Abbott pointed to modelling prepared for the government which finds that “every 1 per cent cut in the company tax will boost jobs by about 10,000”.

The modelling itself refers to it less grandly: “A small increase in labour supply of around 0.1 per cent”.

But on receiving the Henry report Kevin Rudd was convinced. He promised to cut the company tax rate to 28 per cent, only to have the Coalition block the cut in the Senate because it was to be funded by the mining tax.


Abbott is probably right about what the Treasury thinks. Whether the likely gains in wages and jobs are worth the expense is another question.

Politifact rates the claim ‘true’.

In Politifact and The Sydney Morning Herald

Related Reading

. Menezes Flavio, “The Business Tax Reform Agenda”, Economic Papers

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