ESA National Economic Panel Polls
US CORPORATE TAX CUTS_John Hewson
By John Hewson AM (Professor, Crawford School of Public Policy, Australian National University).
Proposition: The recent US corporate tax cuts will have no impact on investments in and capital flows into Australia.
This month’s poll puts a hard line proposition that “the recent US corporate tax cuts will have no impact on investments in and capital flows into Australia”. It’s an “absolute” – NO impact. Economists, in particular, have significant difficulty in being that precise – you know the old adage about “on the one hand, and on the other” – “if you laid all economists in the world end to end you would still never reach a conclusion”.
Yet, even weighting for their declared confidence in response, 27.3% either agreed or strongly agreed with the proposition. But some 55.5%, roughly twice those who agreed, either disagreed or strongly disagreed, with only 17.2% undecided. Interestingly, most of those who disagreed didn’t seem to feel the effects would be significant – they wouldn’t agree to “no impact”, but none argued in their comments for “significant impact”. Indeed, many respondents thought the effects, either way, would be minimal (the main ones being Eslake, Frijters, Toth, Foster, Sheen, Bloch, Quiggin, Nowak, Abelson, Dixon).
Of course, more detail of the US tax measures might have engendered a more fulsome response. For example, Saul Eslake, recorded as uncertain (neither agreeing or disagreeing), made the observation that “according to the IMF (at least) the component of the tax package which is expected to have the biggest impact on economic activity in the US is their ‘immediate expensing of investment’, which is not part of the corporate tax cut proposed by the Australian Government”.
Similarly, a complete answer would have to consider how the US tax cuts will be financed, and particularly whether any short-term benefits are sustainable. It appears that “financing” has been based on the assumption that these cuts will have a significant effect on overall economic growth, which will ultimately cover the early significant impacts on the budget deficit. This is, of course, a highly contentious assumption. In its recent forecasts for US economic growth over the next few years, the IMF has acknowledged an initial boost from the tax cuts, but growth is to taper off after a couple of years.
There is now considerable debate about the so-called “trickle down” effects of corporate tax cuts by way of increased investment, employment, wages, and therefore overall growth. The evidence is mounting that, even over time, the effects could be quite minimal. Similar debate has ensued about why the lowest historical cost of capital since the GFC hasn’t resulted in the anticipated investment “boom”.
In this respect, it is especially noteworthy that dividend payouts by US corporates have nearly doubled since the announcement of the Trump tax cuts. There is an even stronger tendency for Australian companies to distribute and/or buy back their shares with our dividend imputation system, which also discriminates against foreign investment by multinationals.
It is important to recognise that “headline” corporate tax rates are not “effective” tax rates, nor indicative of total corporate tax liabilities, that large multinationals are now particularly adept at minimising their global tax liabilities, and that there are a host of factors that influence investment decisions, and tax is only one of them.
Several respondents in the “disagree” category (especially Freebairn, Makin, Dixon) emphasised the significance of “relative investment returns” that, in and of themselves, would suggest a negative response to investment in Australia, but clearly ignore all the other factors that, in total, determine an investment decision (emphasised by Carmignani, Morley, Foster, Butlin, Nowak, Davis and Corden) including broad economic circumstances and prospects, resource base, proximity to Asia, government policies, relevant infrastructure and support services, labour availability, the exchange rate, production costs, and a host of others.
One thing is for sure. Morrison’s prediction that foreign investors will pull out of Australia "while we are at the beach" hasn’t and won’t happen.