A leading economist has criticised the Turnbull government’s company tax cuts, warning the foreign investment benefits are illusory.
As the Coalition inched closer to a deal with the Senate crossbench on Wednesday to pass the stalled bill, Professor Peter Swan said a largely unknown practice used by foreign investors threatened to erode some of the economic benefit of the $65 billion plan.
University of NSW Business School professor Professor Swan is an expert on investment who advised the Campbell committee of inquiry into the financial system in the early 1980s. His advice led it to propose a system of dividend imputation, whereby company tax payments are refunded to Australians but not foreign dividend holders, a recommendation taken up by Paul Keating in 1987.
His new study on every Australian share traded over the past 14 years concludes foreign owners have largely “exempted themselves from paying corporate tax on marginal investments” by selling their shares to Australians ahead of dividend payments and then buying them back again afterwards.
The tax rules allow so-called recycling or “harvesting” of dividends so long as foreign owners sell the shares at least 45 days before dividends are paid.
“Those who do it face an effective tax rate of close to zero,” Professor Swan told Fairfax Media. “This is an ideal outcome for Australia as we gain the largest and most efficient corporate sector undistorted by taxes.”
But it meant a cut in the company tax rate would be unlikely to trigger a big boost in foreign investment because the foreign investors who were sensitive to tax already had ways to pay very little.
Modelling previously published by the Treasury predicted the company tax cut would boost investment by 2.7 per cent. In addition to stimulating foreign investment, the government argues a reduction in the tax rate from 30¢ to 25¢ in the dollar over a decade will lead to new jobs and more capital investment.
Professor Swan suggested the ongoing annual cost of the tax cut was likely to be $8 billion - more than the government’s estimated $3.7 billion net cost - because the expected boost in foreign investment would not eventuate.
“Where is the case to show that higher investment, even in the unlikely event that it were to eventuate, would yield a gain of this magnitude, even in the longer term?” he asked.
In a statement, a spokesperson for Treasurer Scott Morrison hit back at the claims: “The Turnbull government stands by Treasury’s modelling on the impact and benefits of the Enterprise Tax Plan.
"We need to ensure Australian tax rates for business remain competitive in an increasingly competitive world.”
However, new analysis by ANU economist Chris Murphy, who examined the proposed company tax cut for the Treasury in 2016, has wound back forecasts of the company tax package's benefits.
The new modelling says if company tax cuts were financed by bracket creep, after-tax real wages would eventually be 0.29 per cent higher rather than the previously projected 0.43 per cent. Consumers would be $3.8 billion better off rather than $4.5 billion better off, and gross domestic product would be 0.72 per cent higher rather than 0.92 per cent higher.
Mr Murphy said the changes were the result of updated figures, an improved methodology, and the US switch to taxing territorial rather than world income as part of the Trump tax package.
But he stressed the policy implications were unchanged. Cutting the corporate tax rate would improve consumer welfare, and increase it by more than any other feasible tax change.
For consumers, cutting the company tax rate from 30 per cent to 25 per cent has a benefit that is 2.04 times the costs, a small downgrading of the original estimate of 2.39 times the costs,” he said. By comparison, cutting personal income tax has a consumer benefit-to-cost ratio that is much lower 1.25 to 1.42 times, depending on the nature of the cut.”
Mr Murphy said the data he had examined on the prices at which the rights to dividends were sold did not support the contention that foreign investors were escaping tax by selling dividend rights to domestic investors.
In The Age and Sydney Morning Herald