Wednesday, June 8, 2016

Dean Baker on Australia’s 25 Percent Corporate Tax Rate

Dean is right about a few things here:
As Australia’s election campaign heats up, it seems that one of the central issues is likely to be a plan to cut the country’s corporate income tax from 30 percent to 25 percent. The argument is the same that proponents of corporate tax cuts make everywhere; it will cause companies to invest more money in Australia. This is great children’s story, but it has little basis in reality. There actually is a great deal of research on this topic and it finds very little relationship between corporate tax rates and investment. In the case of my country, the United States, the investment share of GDP peaked in the 1970s when corporations faced a 50 percent tax rate, considerably higher than the 35 percent rate they now face. Of course since U.S. corporations have become quite adept at avoiding taxes, their effective tax rate is close to 20 percent.
His main theme, however, is very misplaced (even if the last sentence in the above quote is quite right):
One of the ironies of proposals to reduce Australia’s tax rate is that the U.S. Treasury would be a major beneficiary. The logic is straightforward, even if seldom advertised by proponents of the tax cut. Under tax treaties, the U.S. credits it multinationals with tax payments to the Australian government on a dollar for basis. This means that if a U.S. multinational has its Australian tax bill cut by $10 million then its U.S. tax bill likely increases by the same amount. The money saved by the company in Australia will go straight to the U.S. Treasury.
This statement not only contradicts his claim about U.S. multinationals having an effective tax rate near 20% - it forgets about permanent deferral of repatriating foreign based profits. Dean may have been misled by the Australia Institute:
It’s important to understand that the US is the largest foreign investor in Australia accounting for over a quarter of all foreign investment. All of those companies will pay the same tax as before, only less to the ATO.
The Australian Tax Office (ATO) is actually much better than the IRS at enforcing transfer pricing. The UK government actually cut its tax rate from 30% to 20% but is putting pressure on its tax authority to step up its game with respect to transfer pricing enforcement. We Americans should learn from the Aussies and the Brits. Also note that if only 25% of Australian foreign investment is from U.S. based multinationals, then the other 75% is from other nations which often have tax rates that may be lower than 30%.

1 comment:

Bruce Webb said...

The problem here is that someone has taken a truism "People do things less if they are taxed more" and applied it to the wrong term.

Generally speaking "investments" are not taxed. Instead "realized gains from investments" are taxed whether this be dividends paid out or drawdowns on owner accounts. If you consider higher corporate or personal rates on income to only apply when they are TAKEN rather than being reinvested before they hit the book in taxable form, which means being reinvested in the same firm, then a higher tax will reduce TAKINGS and increase INVESTMENT. And often due to rollover provisions in the tax code this applies even when gains from one entity are reinvested in another.

90% top marginal rates in the 60s did not suppress reinvestment but instead penalized realized gains. THAT what was being taxed. Once you get your mind around the fact that most "income" tax is actually "realized gain" tax (particularly for individuals) the fundamental fallacy of supply side becomes manifest.

"When you tax something, people will do it less". Well yes mostly. But it is crucial to accurately define the "something".