Opinion article

Tax cuts for stronger investment, higher wages, more jobs

Diane Smith-Gander looks at the economic benefits that would result from reducing the corporate tax rate to 25 per cent.

It is increasingly important that we turn our attention to policies that engage all our citizens in the Australian economy. Without inclusive economic engagement, we leave ourselves open to the potential for the rampant populism now seen in the United Kingdom (UK) and the United States (US). Isn’t it interesting these two places are called united? In my mind, they have never been less united.

In considering the Australian economy and its prospects for the future, we cannot forget that we are the same population size of the state of Texas, living in a land mass the same size as the US. Our relatively small population means a relatively small local labour force and a pool of savings that may be high per capita, but will never finance all the investments that are available in this country.

This drives us to be an open economy. And I think we have successfully navigated this world to allow us to punch well above our weight – we are a G20 economy – but not in the top 50 countries by population. We benefit from foreign investment in projects that create jobs and generate economic taxable activity. We clearly do not have the capacity to produce all the goods and services we want to buy and we deploy comparative advantage well – we export what we do best and import what we are relatively less efficient at producing. It is factual that our economic opportunity and living standards overall are much higher as a result of the foreign trade and investment of our open economy.

What we have done less well, like much of the world, is to ensure workers in trade-exposed industries have the capacity to adjust by providing skills training in advance of change and we should turn policy attention to this matter. To engage all Australians, we must continue our open economy stance but ensure structural shifts do not disadvantage some workers.

Engaging all Australians is a matter of jobs; it is a matter of providing equal opportunity to everyone to have a meaningful job. Labour participation has often been the driver of Australian economic growth so we need policy settings that encourage greater participation.
Our economy has been in the enviable position of growing GDP year on year for a long time. GDP per person grew by 1.1 per cent each year over the last 10 years, but that’s compared to 1.9 per cent over the past 55 years, so well below the long run average.

Today slow economic growth is being felt in households across the country. Real wages growth is positive but living standards are being squeezed as household disposable income continues to stagnate. We have the end of an extended period of high labour demand for resources development arriving at the same time as a rise in energy prices. Employment has been growing, although mainly in part-time jobs and the number of workers seeking more hours of work is close to record high levels. As (Commonwealth Bank Chief Economist and Managing Director, Economics), Michael Blythe noted in his recent CEDA EPO overview  “consumers need more income and the confidence to spend it”.

He went onto say: “Businesses remain reluctant to invest despite a set of fundamentals that would generally favour rising capital expenditures.” I expect domestic capital investment is likely to be sluggish in the medium term.

This makes the access by Australian businesses to global capital critical to support our capital-intensive export industries. If we are not competitive, we will lose sorely needed investment in the critical job-creating industries.

Australia’s company tax rate of 30 per cent is much higher than the Organisation for Economic Co-operation and Development (OECD) average of 25 per cent and 22 per cent in Asia today. The US plans to cut federal company tax to 15 per cent. Cuts are also planned in the UK and France, and are even being considered in Germany.

So we need a 25 per cent company tax rate as soon as possible for all businesses to lead to stronger investment, higher wages and more jobs in Australia. This is not “trickle down” economics – stronger investment delivers a direct benefit to workers and government revenues grow as an economy expands.

I think there is a lot of miscommunication on this topic, which has the potential to cause a populist divide. We keep hearing about the tax cuts costing $50 billion, as if this is a per annum impact.

If we cut the company tax rate to 25 per cent, the revenue lost might be around $8 billion a year. If this reduction was fully funded by raising other less efficient taxes or reducing spending, it is estimated that the size of the economic pie would increase by about $16 billion a year. This would in turn create $4 billion in extra revenues.

It all comes down to whether you believe a lower business tax rate will engender more economic activity, and clearly, I do.

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