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Hanson true to form on company tax cuts

By David Leyonhjelm - posted Wednesday, 7 March 2018


Senator Hanson’s opposition to company tax cuts is disappointing, but unsurprising. The main benefit of company tax cuts is to boost foreign investment, and Pauline Hanson’s One Nation opposes foreign investment. 

The company tax rate is the final rate of tax paid by foreign investors.  So for them a lower company tax rate means any given investment offers a higher after-tax rate of return.  If Australia has a lower company tax rate, foreign investors, who have options to invest anywhere in the world, would pursue more investment opportunities in Australia.  And if our company tax rate is higher than other countries in which they have an interest, they would pursue fewer investment opportunities in Australia.

Consider an example.  A subsidiary of global bank HSBC is the biggest shareholder of our two biggest employers, Wesfarmers (owners of Coles) and Woolworths.  The higher our company tax rate, the lower will be the after-tax rate of return from building a new supermarket, meaning that fewer supermarkets will be built and fewer Australians will be employed.  And as there would be no bidding war for workers, there would be no boost to wages.

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More than half a million Australians voted for One Nation, in part of because of opposition to foreign investment.  The irony is, many of these voters are employed by companies like Wesfarmers and Woolworths, and their futures and the futures of their families rely on foreign investment.

While Senator Hanson’s opposition to company tax cuts is consistent with her opposition to foreign investment, she has put up other arguments to justify her position.  Each of these arguments is weak.

Senator Hanson says tax cuts alone are not enough to encourage investment.  This is not an argument against tax cuts; it is an argument for other pro-investment reforms, like cutting red tape, in addition to tax cuts.

Senator Hanson says no one knows what companies will do with additional cash from a company tax cut.  This sounds as if she will only support changes with mandated outcomes, reminiscent of centrally-planned command economies.

She says that instead of investing more, companies could pay down debt, increase shareholder returns or lower prices.  This is true, but all of those are good outcomes and many companies would increase investment to boot.  The idea that no companies would increase investment is fanciful and argued by no-one, not even the Greens.

Senator Hanson says a company tax cut would not help workers or retirees because of dividend imputation.  This would be true if all companies immediately distributed all after-tax profits every year, because the increased dividends would be perfectly matched by reduced dividend imputation credit.  But companies don’t do that; they reinvest a proportion of their profits.  So, as each year passes, a company tax cut would boost the funds that companies reinvest.  This translates into additional jobs. And then when this investment flows through to profits, the increase in the distribution far exceeds the drop in the dividend imputation credits.  A company makes a return on reinvested profits, not on dividend imputation credits. A company tax cut would undeniably help workers and retirees despite dividend imputation. 

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Unfortunately, it seems One Nation is deaf to informed advice on how dividend imputation works.

Finally, Senator Hanson says company tax cuts could lead to a catastrophic tax collection shortfall. In fact, already high Commonwealth tax collections will rise in years to come even if company tax cuts are legislated.  Senator Hanson’s lament only makes sense for fans of big government. 

Our current debt and deficit crisis is not caused by falling tax collections, which are as high now, after accounting for inflation and population growth, as they were a decade ago.  The crisis is caused by government spending, which is higher than it was a decade ago and still growing.  If more Senators were willing to join me in advocating for across-the-board spending cuts, that might not be the case.

Some people supported One Nation because of its opposition to foreign investment, so they will be heartened by One Nation’s opposition to company tax cuts.  But others supported One Nation because they saw it as a less stuffy version of the Liberals.  One Nation’s opposition to company tax cuts means these more market‑oriented supporters of One Nation should be reconsidering their support.

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This article was first published in the Australian Financial Review.



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About the Author

David Leyonhjelm is a former Senator for the Liberal Democrats.

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