Little evidence to support a cut in corporate tax
To see what I mean, try to list as many political slogans as you can without thinking too hard.
I can recall five Coalition slogans immediately: "Stop the boats", "Axe the tax", "This is a dishonest government", "She needs to come clean", and "Get back to surplus".
I can also recall without trying two slogans associated with the Sydney radio host Alan Jones, who (I suspect) is a Coalition supporter: "Ju-Liar" and "She needs to be put in a chaff bag".
But I can remember only three Labor Party slogans before getting stumped: "Going forward", "Working families", and "Stronger, smarter, fairer".
By listing these stupid slogans, it can remind one how our national political debate has unfurled over the past few years, to a dumb and steady beat.
But the phenomenon isn't confined to federal politics. Propaganda is ossifying the arguments we're having elsewhere, too.
Take the economics profession.
A popular argument propagated today is the idea that our economy will necessarily benefit if the corporate tax rate is cut.
The argument goes something like this: a reduction in the corporate tax rate (30 per cent) is necessary to increase investment and spur employment growth. If this is done, it will increase the size of the economic pie.
But is this claim true? Has anyone tried to test the proposition and apply it to Australia?
Since Adam Smith, economists have been great propagandists. They're good at squeezing their descriptions of complicated real world phenomena into tiny models that can be regurgitated, en masse, in essays and lecture halls and TV interviews.
Just think of the remarkably potent and popular phrase, the "invisible hand".
You may have heard it being used. You may also know that it can be found in Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations (1776). But you probably don't know that Smith only used it three times in his oeuvre. Could you say in what context he used it? Probably not. Does it matter that each time he changed its meaning? For today's purposes it wouldn't matter.
The reason why modern politicians like to use the phrase so much is because it's great for propaganda. It comes with a "frame", and if you understand what that frame is - that markets operate best when governments don't interfere with them - then regardless of what Smith actually meant by the phrase, you understand what the phrase is supposed to mean. Thus, it has become a vessel for ideology that helps politicians and their economist friends to bamboozle the economically illiterate.
Jump forward a couple of hundred years.
Just this week, the chief economist of the Chamber of Commerce and Industry, Greg Evans, repeated an argument about corporate tax cuts that was very similar to the one sitting a few paragraphs above.
I had called him to ask him what he thought of the view of Geoffrey Cousins, the millionaire businessman and current Telstra director, who said this week that wealthy Australians had a civic duty to pay their "fair share" of tax.
If Australians wanted to maintain their standard of living then the wealthy would have to start paying more, Cousins argued.
But Evans said Australia actually had to cut its company and personal tax rates because we needed lower rates to attract investment. Australia was part of the Asian region, he said, to which our future was tied, and our economic neighbours already had much lower tax rates than us. So if we wanted to remain competitive in the region - and remember, competition and productivity are the things that will help our economy to grow - then we ought to cut our tax rates to match our neighbours.
It was an elegant argument but where's the evidence to support it?
The Australia Institute's Richard Denniss says he and his colleague David Richardson actually tested the proposition in December, with specific regard to the corporate tax.
They wanted to see if there was strong empirical evidence to support the claim that cutting the corporate tax rate would have significant macroeconomic benefits in Australia, as usually suggested. What did they find?
"Despite the widespread support for this view, particularly among the business community, the theoretical and empirical case for such an expensive change in policy is weak," their report says. Huh? Their paper's worth a read, and we don't have time to cover everything here, so here's an example of the way they present their argument.
From 1940 to 1987, the corporate tax rate fluctuated between 45 and 49 per cent.
Since 2001, the corporate tax rate has been 30 per cent.
If one of the most commonly cited benefits of a cut in the corporate tax rate is supposed to be an increase in employment, what's happened to the unemployment rate after 2001?
Well, when the company tax rate was 45 to 49 per cent, the average unemployment rate was 3.3 per cent.
Since the tax rate fell to 30 per cent, the unemployment rate has averaged 5.2 per cent.
So the unemployment rate has actually gone up, despite the company tax rate dropping 15 percentage points.
They explain what they think might be the problem: "The promise of job creation on the part of business does not count for much when official policy seems to be to hold unemployment around 5 per cent.
"That is, given monetary policy is used to stabilise the unemployment rate at around 5 per cent, it is unclear how a lower corporate tax rate could lead to an increase in employment above the level of 'full employment' determined by the Reserve Bank."
What about the effect on investment?
Since 2001, investment in the private sector increased from an average 20.7 per cent of gross domestic product to 22.1 per cent.
But that increase of 1.4 per cent of GDP in private investment, they argue, is "more than accounted for by the privatisations of public utilities and the mining boom".
OK. Well, surely the rate of economic growth has improved since 2001?
Wrong again.
"Real economic growth averaged 3.8 per cent between 1960 and 1987, but fell to 3.1 per cent in the period since 2001."
They conclude: "If there is any truth in the proposition that lower company tax is good for the economy the effect has been too weak to make a noticeable difference in the macroeconomic data."
Good luck packaging that into a slogan.
Ross Gittins is on leave
Frequently Asked Questions about this Article…
Supporters argue a corporate tax cut (from the previous higher rates to the current 30%) will attract investment, boost productivity and create jobs — often saying Australia must match lower tax rates in our Asian region to remain competitive.
According to a report from the Australia Institute (Richard Denniss and David Richardson), the empirical evidence is weak. The report notes unemployment averaged about 3.3% when company tax was 45–49% and about 5.2% since the rate fell to 30%, and it argues monetary policy tends to hold unemployment around 5%, making it unclear that tax cuts would raise employment above that level.
Private-sector investment did rise slightly — from an average of 20.7% of GDP to 22.1% of GDP since 2001 (an increase of about 1.4 percentage points) — but the Australia Institute says that rise is largely accounted for by privatisations of public utilities and the mining boom, not obviously by the tax cut itself.
No. The Australia Institute points out real economic growth averaged 3.8% between 1960 and 1987, but has averaged 3.1% in the period since 2001, so there is no clear improvement linked to the corporate tax cut in the headline growth data.
Their conclusion was that despite widespread support from parts of the business community, both the theoretical and empirical case for such an expensive policy change is weak, and any positive macroeconomic effects of lower company tax appear too small to show up clearly in the data.
Business representatives, like the Chamber of Commerce and Industry’s chief economist Greg Evans, argue lower company and personal tax rates will make Australia more attractive to investment compared with lower-tax neighbours in the Asian region — a competitiveness argument used to justify tax cuts.
Be cautious: slogans simplify complex economics. The article stresses that catchy political lines can mask weak or mixed evidence. Investors should look at the data on employment, investment and growth and read independent analyses (such as the Australia Institute report) rather than rely on short slogans.
Yes. The Australia Institute describes cutting company tax as an "expensive" policy change and argues the theoretical and empirical justification is weak, implying there are trade-offs and fiscal costs to consider before pursuing broad tax cuts.
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