US corporate tax cuts - March 2018
Proposition: "The recent US corporate tax cuts will have no impact on investments in and capital flows into Australia."
Collaborator credits: we would like to thank John Hewson for his assistance in framing this poll question and for his expert overview of the results.
Overview of poll results by John Hewson
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”.
Responses (30)
Peter AbelsonDisagree
7
Saying that the US corporate tax cuts will have "no" impact on capital inflows to Australia is too strong. But, in my view, the impacts will be minor as companies need to support existing investments and Australia remains an attractive destination for new capital investment.
Harry BlochAgree
8
Saying "no" impact is a bit strong, but whatever impact occurs would be too small to be measurable by standard methods. Multinational firms have shown themselves very adept at avoiding profit taxes or at least transferring them to low-profit jurisdictions, whether Google or Apple take their profits in Ireland or the US will have little impact on their activities in Australia.
Matthew ButlinDisagree
8
The real question is not "yes or no" but "how much". The effect of the tax cuts will be to improve - in isolation and all other things being equal - the attractiveness of the US as an investment destination compared with all other jurisdictions. There is some debate about the size of the improvement in comparison with Australian tax rates and hence the size of the likely impact. That said, taxation treatment is only one aspect of the investment decision. There are typically many other considerations including the availability of necessary inputs, logistics, proximity to markets, unit costs of production and so on.
Fabrizio CarmignaniAgree
8
Investment in Australia is mostly driven by factors other than taxation. For instance, mining companies invest in Australia because we have minerals and a change in the US tax rate is not going to alter this. Therefore, the worst possible thing that we could do is to decide that we need to cut our own corporate tax rate in order to make our economy more attractive to foreign investment. This would not increase our competitiveness by one bit, but it would surely have a negative impact on the budget and lead to a cut in the supply of public goods and services. The ultimate result would be more inequality and slower growth.
Bruce ChapmanStrongly agree
8
Ken ClementsStrongly agree
10
Deborah Cobb-Clark2Strongly disagree
8
Max CordenAgree
6
The main consideration is the attractiveness of investing in Australia. If our government spends its income from tax on foreign capital wisely it will improve the infrastructure environment, and that will make investment in Australia (for Australians and foreigners) more attractive.Similarly, improving education in Australia will also make such investment more attractive. Of course the level of the US corporate tax can have some effect. But we must keep in mind the effects on the Australian (federal and state) government budgets, and the benefits that government spending can yield.
Kevin DavisUncertain (neither agree nor disagree)
5
With a floating exchange rate, the aggregate capital inflow will only change if the current account balance changes. To the extent that the supply curve of foreign capital shifts inward due to foreign tax cuts then some AUD depreciation could occur improving the current account balance and thus implying less foreign capital inflow in equilibrium.
Janine DixonDisagree
8
(with Jason Nassios): It is difficult to agree with the proposition that the recent US corporate tax cuts will have no impact on investments in and capital flows into Australia. The US is a large consumer of foreign-financed capital, and a cut to US corporate tax rates makes investing in the US even more attractive, leaving the rest of the world, including Australia, with less. But how much less?The US accounts for around 20 per cent of the world’s capital stock, and equity in the US accounts for around 25 per cent of US capital stock. That means 20 per cent of 25 per cent, or 5 per cent of world capital stocks, will be subject to the tax cut. Taking into account deductions for interest and depreciation, our most generous estimate is that rates of return on these stocks could increase by around 1 percentage point as a result of the tax cut. If we also take into account new caps on interest deductibility, the impact on rates of return could be much less. So, if 5 per cent of the world’s capital stock gets an increased rate of return of 1 percentage point, how does this affect investment in Australia? We ran this though the VU financial CGE model* and found that investment in Australia, of which around 20 per cent is foreign financed, would be a quarter of a percent lower than it would have been without the tax cut. Over time, investment would recover somewhat, as the “bad news” is gradually transmitted into a lower wage rate. Does this mean Australia should follow suit? Our argument against cutting company taxes has always been that the upfront loss of taxation revenue – a windfall gain to foreign investors – is too great to justify the long run benefits derived from a stimulus to foreign investment. The US tax cut tilts the parameters of this argument towards supporting an Australian tax cut, but probably not by enough. *https://onlinelibrary.wiley.com/doi/full/10.1111/1475-4932.12341
Brian DolleryStrongly disagree
8
Since US corporate tax cuts change relative rate of return on Australian investments there will obviously be an effect. However, the strength of this effect cannot be known with any degree of precision.
Uwe DulleckUncertain (neither agree nor disagree)
8
I find it difficult to predict the impact of these changes to US taxation. In the long term, I feel the uncertainty that we see around public policy under the current American administration may have more effects on investment than the tax cuts. Furthermore, it is unclear whether these changes are sustainable - I do expect them not to be. All of these reasons indicate for me that long term impact is unpredictable - as is most of US policy at the moment.
Saul EslakeUncertain (neither agree nor disagree)
6
It is possible that the US corporate tax cuts will have some impact on the flow of foreign investment into Australia - although I’d note 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. Additionally, it’s not clear whether the type of investment most affected will be ‘investment’ in the sense usually used by economists, or ‘investment’ in the sense of, for example, foreign takeovers of existing companies. Finally, I’d emphasise that tax rates are but one of a number of factors which determine investment choices by companies.
ALLAN FELSAgree
7
Gigi FosterDisagree
5
"No impact" is too precise a prediction to agree with. However, the much-fanfared changes to the US's headline corporate rate mask many details in relation to state tax rates, exemptions, and other rules and opportunities that combine to make the change in the effective US corporate tax rate in all likelihood far less dramatic than the change in the headline rate. Furthermore. corporations do not base their investment decisions entirely, or even primarily, on differences in taxation regimes between countries. Australia will continue to offer companies a unique mix of inputs, infrastructure, institutions, and market access in the Asian region. Yet the rate changes are being noisily advertised, which is likely to prompt some businesses to at least reconsider their international positionings. I would expect the new rules to trigger more changes in the global distribution of where companies park their profits than in the global distribution of where they invest or conduct business. Australia may be affected somewhat by the former and probably not much by the latter, to the extent that the latter occurs more than negligibly.
john FreebairnStrongly disagree
10
There are many global investors located in many countries looking for the best after-tax return on their funds. The USA corporate tax changes will increase the after-tax return on investments in the USA. Some global investors will shift some of their funds from elsewhere, including from Australia, to chase the higher returns in the USA, and accept a lower pre-tax return but still receive a higher after-tax return on the funds switched to USA investments.
Paul FrijtersDisagree
7
The latest numbers are that US owners own 860 billion in Australian assets, making the US the biggest foreign investor in Australia. The corporate tax cuts are essentially a transfer from the population (who would get the benefits of the public spending) to corporate profits, which in turn will show up as investments somewhere. So yes, investments in Australia are likely to rise in the short run due to this change, though in the scheme of international financial flows it is probably peanuts. In the longer-run, the lack of public investments that the US corporate tax cuts entail will hurt the US and thereby indirectly its major trading partners, including Australia. But that is not our problem and since China and India are likely to keep booming and thus more than make up for any shortfall of demand from the US, this too will not have all that much effect. So I expect a small short-run increase in investments at the expense of a longer run small decrease in trade and capital flows with the US.
Renee Fry-McKibbinStrongly agree
9
Prue KerrDisagree
7
Since the main determinant of decisions concerning both real and financial investments is uncertainty about the future behaviour of other variables - economic and political and local, global and US - e.g. interest rates, exchange rates, prices of Australian tradables, legislation affecting markets for tradable commodities as well as currencies... Given the uncertainty created by current US economic and foreign policy decision-making, and the status of Australia's 'relationship' with US, it is very difficult to predict anything confidently!
Geoffrey KingstonDisagree
7
Australia and the United States have surprisingly similar endowments of resources, and this is a major reason why trade between the two countries is surprisingly muted. Examples include hydrocarbons and agricultural land. As a consequence, the recent US corporate tax cuts are likely to see a substantial redirection of international capital flows, out of hydrocarbons, agriculture and some other Australian industries, and into their US counterparts.
Michael KnoxStrongly disagree
9
In a paper we published for our clients last year on 26 October we suggested that the cut in US corporate tax cuts would "result in a shift back to the US of some 34% of US corporate income."Our paper was based on an extensive literature published as a reference list to the "Corporate Tax Reform and Wages: Theory and evidence," published by the Council of Economic Advisers of the US President in October 2017. A shift of corporate income of this side back to the US will not just effect Australia but many other countries as well.
Tony MakinStrongly disagree
10
Foreign investment theory tells us that international capital flows are determined by relative, after tax, rates of return on capital. See International Money and Finance Ch 13. The sizeable US corporate tax cuts have effectively raised the rate of return on capital in the US, making investment there significantly more attractive. The US is easily the largest foreign investor in Australia, accounting for over a quarter of Australia's total foreign investment, so the US corporate tax cut will obviously mean less investment here. This bodes poorly for the future of the economy, given business investment has persistently been the weak link in the national accounts. It also clearly suggests Australian company tax has to be cut, other things equal, preferably as part of a larger fiscal package that includes offsetting savings.
James MorleyDisagree
10
Surely they will have some impact. There are a lot of factors that drive capital flows, with corporate tax rates only being one of them. But it would be extreme to think there would be no impact.
Margaret NowakUncertain (neither agree nor disagree)
6
Any Investment decision can be expected to be dependent on rigorous assessment of the expected rate of return (pre-tax) on that particular capital expenditure within the overall context of the business. A change in the rate of corporate tax in the US is not expected, in the short to medium term, to affect any assessment of pre-tax rates of return on Australian based investments. Tax rates will impact on comparative returns, all else equal, should an organisation have competing investment opportunities in the US within its stable. However, there are a number of factors which need to be considered and which make any outcome very uncertain. These include the potential impact of the US decisions on tax rates on the comparative rate of inflation in the US and on the US exchange rate. Focus also on the headline rate of Federal corporate tax in the US is misleading (state based US corporate taxes plus the intricacies of national tax laws) as it is the effective overall rate the organisation expects to pay which, at the margin, could make a difference. How the relevant effective overall rates compare, plus the potential macro-economic impacts of the US tax cuts means any marginal impact of the US decision is, at best, uncertain.
John PiggottDisagree
6
It is always difficult to judge the impact of corporate taxes on the locational decisions of firms. But is hard to believe they are of no consequence. According to DFAT, the US is our largest foreign investor. So a net decrease in investment outflow from the US will likely impact Australia.
John QuigginUncertain (neither agree nor disagree)
7
The bigger problem is that, to a first approximation, an increase in foreign investment in Australia, will have zero effect on net national income. The increase in GDP will either be offset by depreciation or will be paid out as returns to the foreign investors.
Jeffrey SheenUncertain (neither agree nor disagree)
7
Through international tax competition’s long-term distributive effects and its shorter-term cyclical effects, the recent US corporate tax cuts will have an ambiguous and likely small effect on Australian investment and capital inflows.
Hugh SiblyDisagree
8
Julie TothDisagree
8
Changes to US corporate taxation arrangements are intended to encourage US multinationals to repatriate profits earned overseas back to the US and to pay tax on those profits in the US instead of elsewhere. US companies will also be strongly encouraged to increase their investments inside the US, instead of investing in Australia or elsewhere. The aggregate impact on US investment into Australia is likely to be small (relative to total Australian investment and/or total US international investment) but it will not be zero.
Joaquin VespignaniAgree
6