Official modelling shows little benefit from a cut in company tax

Be sure your dodgy modelling will find you out. I’m starting to think economists have become so used to pretending to know more about the economy than they really do that they don’t notice the way they mislead the rest of us.

The Productivity Commission has proposed a radical change in the way companies are taxed which, it tells us, would improve the economy’s productivity and leave us better off. It has commissioned modelling that, it implies, supports its case for change.

But when you read its report – and add some knowledge of how “computable general equilibrium” models of the economy work – you’re left with nothing but doubts.

The proposal involves cutting the present 30 or 25 per cent rate of tax on company profits to 20 per cent for all companies except the 500 or so with annual turnover (total sales) of more than $1 billion.

But it also involves introducing a 5 per cent tax on the annual net cash flow of all companies. This new tax would include an allowance for the cost of companies’ equity capital, and an immediate write-off of the cost of newly purchased assets, but no allowance for interest paid on the companies’ borrowing.

The commission paid for two sets of modelling of the proposed changes, one from Chris Murphy, Australia’s leading commercial modeller, and the other from the leading academic modelling outfit, the Centre of Policy Studies (CoPS) at Victoria University.

The commission’s report compares the results of the two modelling exercises for just the first proposed change, cutting the rate of company tax to 20 per cent for all but the top 500 companies.

According to the Murphy model, this would cause companies to increase their investment in new equipment by 1.4 per cent, improve “productivity” by 0.4 per cent, increase real gross domestic product by 0.4 per cent and increase real before-tax wages by 0.6 per cent.

The CoPS modelling results are similar in some respects. It expects a smaller increase in business investment of 0.6 per cent, but improved productivity of almost as much, and the same increase in before-tax wages, even though GDP increases by only 0.2 per cent.

Does the modelling provide reasonably strong support for cutting company tax to make the economy bigger and better? Well, no, not really. Those results are shockingly small.

Economists have gone for years making their modelling results seem grander than they are by, in this instance, letting the rest of us conclude that the estimated increases of 1.4 per cent, 0.4 per cent and 0.6 per cent represent annual increases in the rate of growth in business investment, productivity, GDP and before-tax wages.

Wrong. What the people waving modelling results around rarely bother to make sure the punters understand is that these are once-only increases in the levels of investment, productivity, GDP and before-tax wages. What’s more, they’ll come about only “over the long run”.

And how long is the long run? They rarely bother to tell us – especially as it can vary with the modeller. But if you dig deep you can find out. CoPS sets it at five years, I’m told, but it’s more usually thought of as about 10 years. And the commission’s report seems to be saying that its comparison of the two modelling exercises is what they estimate will be the story in 2050.

Get it? We’re considering a hugely expensive cut in the rate of company tax in the belief that this will cause real GDP to be between 0.2 and 0.4 per cent greater in five to 25 years’ time.

Really? Its modelling shows the benefit from cutting the rate of company tax would take years to materialise, and still be trivial, but the commission thinks we should do it anyway.

See what this is saying? Even the economists who commissioned this modelling don’t take its results seriously. Why not? Well, for a start, they know how primitive and grossly oversimplified these modelling exercises are. It’s as though the economy they’ve been able to model is one inhabited by stick figures, not humans.

As modelling is such a dodgy exercise, economists know they don’t have to believe any results they don’t fancy – because, in truth, economics is based more on religious belief than scientific inquiry. What figures largest in the thinking of economists is the model of the economy they’ve been carrying around in their heads since about second year uni.

The model in their head tells them taxes discourage and distort economy activity, meaning lower taxes are always better. So if econometric modelling tells them a rate cut would make little difference, they’re undeterred.

Speaking of taxes, one reason the effects of a cut in company tax are so modest is the standard assumption that the lost government revenue has to be covered by tax increases somewhere else. The modellers here have assumed it’s covered by a “non-distorting lump-sum tax” (which doesn’t exist in the real world) or by bracket creep (a hidden, lasting increase in personal income tax).

Significantly, this would be why, under Murphy, the real wage increase of 0.6 per cent before tax, turns into an after-tax increase of zero. Really? We want to improve productivity to raise our material standard of living, but real after-tax wages would be unchanged under Murphy – or, under CoPS, would actually fall by 0.5 per cent. Great idea, eh?

Finally, economists at the Australia Institute reveal that what the commission chooses to call “productivity” is actually “output per worker”, which ain’t quite the same thing.

It turns out that, according to the modelling, national output per worker increases not because any worker becomes more productive, but because the company tax cut’s reduction in the after-tax cost of capital causes our capital-intensive mining industry (which thereby has higher output per worker) to expand at the expense of the labour-intensive health and education sectors.

And this would be progress, would it? The sad truth is that modelling is used to help sell policy changes someone thinks we should make, not to improve our understanding of what works and what doesn’t.

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PC wants our big mining companies to pay more 'rent'

If you get the feeling that the profits some big businesses make are far more than they deserve – exorbitant, in fact – you’re not wrong. “Super profits” are something economists are well aware of, though they rarely say much about. And they prefer to call it “economic rent”.

Economic rent has nothing to do with what you pay to live in someone else’s house. And it’s money you receive, not money you pay. Why economists call it “rent” is lost in the mists of the history of economic thought. Maybe they just like using jargon other people don’t understand.

But in one of the reports the Productivity Commission has produced for the economic roundtable, it wants to make sure we all understand economic rent. Why? Because it wants to partially replace the present company tax with a tax on companies’ “net cash flow”. And the great advantage of this new tax, we’re told, is that it taxes companies’ economic rents, not their ordinary profits.

When a company considers setting up a business, it needs to earn a certain rate of return – that is, an after-tax profit after allowing for all its direct costs. The after-tax return is the company’s shareholders’ reward for investing their savings in the business rather than, say, lending it to someone.

And for the company to stay in the business, the rate of return it receives needs to be at least as great as what it could earn by moving to some other industry. Economists call this its “opportunity cost”.

But here’s the point: if the company’s after-tax return exceeds its opportunity cost, the extra bit is its economic rent. This rent is a sign the company’s profits are bigger than they need to be.

Sometimes these extra profits are temporary. Other businesses see how much moolah is being made, enter the market and, in the process of getting their share, bid down prices and profits. So, competition has removed the economic rent.

Often, however, the economic rent is lasting. This can be because the existing business has a special advantage other firms can’t share or copy. They’ve got the best location or have cornered the market in some other way. (Or, of course, they may have persuaded the government to grant them some special advantage other firms or industries don’t get. This, by the way, is why economists call businesses that ask for government favours “rent-seekers”.)

For Australians, note that economic rent is common in mining. Some minerals are in high demand, but limited global supply. Some mines are better located, or have deposits that are higher quality or nearer the surface.

Note, too, that pop stars and film stars also receive economic rent. Some of them earn far more than others because they have more charisma or a bigger following. (Please don’t tell my boss, but even I make a bit of rent. I’d do this job for a lot less than I’m paid. And nor could I make as much in some other occupation. So why doesn’t the boss pay me less? I guess because he’s worried some rival editor might offer me more.)

In other words, there are many companies and individuals earning economic rent that we can’t do much about. The commission sees this as a problem because the ability of some businesses to charge higher prices than necessary reduces the economy’s efficiency and causes living standards to be lower.

Which brings us to company tax and taxes generally. Economists worry that imposing taxes on certain activities distorts people’s behaviour. Taxing companies’ profits, for instance, may discourage them from expanding – or setting up in the first place.

So how widespread is economic rent? The commission says that modelling undertaken for its inquiry estimates that 54 per cent of the company income tax base takes the form of economic rent. This is up from an estimate of 41 per cent in 2018.

Taxing individuals’ incomes may (repeat, may) discourage them from working as hard. And taxing the purchase of some goods and services but not others may encourage people to buy stuff that’s not what they would prefer.

See where this is leading? We often need higher taxes to cover increased government spending and stop the government’s debt getting too big. However, economists worry that higher taxes will discourage people from working and investing, as well as distorting their purchases.

But if economic rent is bad for the economy – if it reduces efficiency and holds back living standards – doesn’t that mean taxing it, even taxing it quite heavily, can help reduce the budget deficit without harming the economy?

This is why the commission wants us to cut back ordinary company tax and start moving to a new 5 per cent tax on companies’ net cashflow. On one hand, ordinary company tax discourages investment even in companies that aren’t earning economic rent because it reduces their after-tax rate of return.

On the other, the commission argues, a cashflow tax would not distort decisions to invest via companies because it’s designed to tax only their earnings above their required rate of return. That is, it’s designed to tax only the companies’ economic rent – if any.

Remember, we’re supposed to be finding ways to improve our productivity. The commission notes that one of the main ways businesses have increased the productivity of their labour over the years has been to give their workers more and better machines to work with. Lately, however, firms’ spending on plant and equipment has grown only slowly.

That would be another benefit of transitioning from ordinary company tax to a cashflow tax. Under the old way, spending on new equipment reduces taxable income only over a number of years via annual depreciation.

Under the cashflow tax, they would get a full deduction for such spending in the year it was made – which should encourage companies to spend a lot more on productivity-enhancing equipment.

Now, tax economists have long been huge supporters of a cashflow tax. But no country has been game to try it yet, and I doubt if Anthony Albanese is the guy who would like to go first.

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Roundtable will fix nothing unless we can all park our self-interest

I’m not sure if it’s happening by accident or design, but we may be about to convince ourselves that, though our democracy isn’t nearly as stuffed up as America’s, we’re fast making ourselves ungovernable, unable to agree on how to fix our problems.

I fear that Treasurer Jim Chalmers’ economic roundtable in a fortnight’s time won’t reach agreement on any measures of substance. The players – business on one side, the unions on the other, plus assorted experts – confidently assume that the Albanese government will use this indecision to come up with its own set of solutions.

But what if it doesn’t? Everyone complains that this government’s too timid, unwilling to risk losing votes by making the controversial changes we need. Surely, it could use the roundtable’s failure to agree on anything as its justification for doing nothing. “When you guys can agree on what we should do, we’ll do it.”

Initially, the roundtable was to discuss the great worry of our times – productivity. Almost every year since forever, our economic production machine has got a fraction more efficient at turning economic resources into goods and services, thus raising our material standard of living. But for the past decade or so, it seems to have stalled. Why? And what can we do to get it going again?

But Treasury would have been quick to remind Chalmers that the budget is expected to be in deficit for as far as the eye can see. Something needs to be done about this, and the government is certainly in no position to try to fix productivity by cutting taxes.

And, led by former Treasury secretary Dr Ken Henry, the nation’s economists will tell you our biggest economic problem is that our tax system, which is little changed since the introduction of the goods and services tax 25 years ago, is no longer working properly. It needs a major overhaul.

In economics, you can’t get away from tax. Our productivity is determined largely by what happens inside the nation’s factories, mines and offices. Ask any economist what can be done to make our businesses more productive, and they’ll want to do it by changing the “incentives” businesses face. Translation: pull some kind of tax lever.

So it’s no surprise that, when the Productivity Commission was asked to offer some suggestions, its first was to rejig company tax in a way that encouraged greater business spending on more and better machines for the workers.

Almost all our companies would pay less tax, but this loss to government revenue would be covered by making the big tax-dodging foreign multinationals pay more.

Trouble is, when you boil it down, the (big) Business Council of Australia exists to protect the interests of big foreign businesses, which want to make profits in Oz but pay negligible tax. Amazingly, the Business Council has persuaded Canberra’s 23 other business lobby groups to join it in rejecting the company tax changes.

Now the ACTU has proposed curbs on negative gearing, the capital gains discount and the use of family trusts – all of which allow the well-off to minimise the income tax they pay.

The financial press seems to think this means the Labor government will rush off to do the unions’ bidding, even though Albanese has explicitly rejected these reforms, and the well-off would fight them tooth and nail.

Somehow, I doubt it. I think it will confirm Albo in his resolve to do very little.

What depresses me is realising the way our democracy has devolved into a self-interested fist-fight. Every interest group goes all out to extract as many benefits as possible while paying as little tax as possible – and may the deepest pockets win. Which they often do, by way of bribes to the political parties. This triumph of self-interest over co-operation is promoted by a small army of lobbyists and an increasingly partisan media.

The politicians themselves have fostered this notion that we should vote for the party that’s offering us the best deal. “Vote in the national interest? Vote for the party that would try to be fair to everyone and protect the poor? What kind of sucker do you take me for?”

It hasn’t got them far, but for years the Liberals have promoted themselves as the party of lower tax. What’s more, they can do it without any reduction of “essential services”. This has always been no more than wishful thinking – and Labor’s not much better.

The result is people convincing themselves that taxation is the great evil, that asking me to pay more tax is outrageous, and expecting tax cuts at every election is no more than my due.

In truth, what we’re saying is “I want to pay less, so find someone else to pay more”. Those who fondly imagine government spending involves huge waste and could easily be slashed with no harm to anyone are deluded. And they never come up with specifics on what spending could be cut.

When businesses demand lower company tax, they’re arguing that consumers should pay more GST. When well-off individuals (like me) demand lower taxes, what they’re really saying is: “Please stop asking me to subsidise people less fortunate than me. I don’t care how hard they’re doing it.”

And now, would you believe, we have Professor Ross Garnaut popping up last week to warn that Australia’s transition from fossil fuels to renewable energy is happening too slowly, so we’re not on course to get our emissions down to net zero by 2050.

The private sector isn’t building many new solar and wind farms because there isn’t enough money in it, and the solution is to bring back the carbon tax abolished by that man of great foresight Tony Abbott.

Really, another tax? I don’t see Albanese doing that, either. And the notion that governments should have the courage to force on us things most of us oppose is another idea from Fantasyland.

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Big business quick to veto productivity tax reform

Well, you can forget about Treasurer Jim Chalmers’ three-day roundtable discussions leading to any improvement in the economy’s productivity and growth, let alone getting the budget back under control.

Late last week, the Business Council of Australia persuaded all of Canberra’s many other business lobby groups to join it in rejecting out of hand the Productivity Commission’s proposal for reform of the company tax system which, the commission argued, would increase businesses’ incentive to invest more in productivity-enhancing plant and equipment, without any net reduction in company tax collections.

The proposal is for the rate of company tax to be cut for all but our biggest 500 companies, while introducing a 5 per cent tax on the net cash flow of all companies.

The join statement by 24 business lobby groups says that “while some businesses may benefit under the proposal, it risks all Australian consumers and businesses paying more for the things they buy every day – groceries, fuel and other daily essentials”.

Get it? This is the lobbyists’ oldest trick: “We’re not concerned about what the tax change would do to our profits, dear reader, we’re just worried about what it would do you and your pocket. It’s not us we worry about, it’s our customers.”

Suddenly, their professed concern about the lack of productivity improvement and slow growth is out the window, and now it’s the cost of living they’re deeply worried about. They’ve been urging governments to increase the GST for years, but now they don’t want higher prices. Yeah, sure.

Bet you didn’t know there are as many as 24 different business lobby groups in the capital. Their role is to advance the narrowly defined interests of their paying clients back in the rest of Oz by means fair or foul. They’re not paid to help the government reach a deal we can all live with, nor to suggest that their clients worry about anything other than their own immediate interests.

Canberra calls this lobbying. Economists call it rent-seeking. You press the government for special deals at the expense of someone else, while ensuring you contribute as little as possible. This, apparently, is the way democracy is meant to work.

And if the lobbyists can play this game, why can’t the business press join in? As its blatantly partisan commentary makes clear, big business’ only interest in attending the government’s roundtable was to come away with some new concession, ideally a cut in company tax.

At the summit after Labor was elected in 2022, business came away with nothing, we’re told, while the unions got all they wanted. Well, not gonna play along with that again.

It’s no surprise the Business Council is so opposed to the Productivity Commission’s proposal, which would reduce the tax paid by all companies bar the top 500. They’d get no cut in conventional company tax, but would pay the new 5 per cent cash flow tax.

Which lobby group roots for our biggest companies? The Business Council. What is surprising is the ease with which it was able to persuade all the other business lobbies to join it in helping protect the Big 500, even though most of their own members should have benefited from the deal.

Huh? I think the explanation is in the first sentence of the joint statement: the “proposal to tax business cash flow is an experimental change that hasn’t been tried anywhere else in the world”.

True. So, a simple case of resistance to radical change. And who could blame them? Economists – and the Productivity Commission itself – don’t have a good record in promoting radical changes that look good on paper and also work in practice. Think: the whole neoliberal project and, especially, the notion that creating from nowhere a market for the supply of disability services would be easy and efficient. It’s wasted billions.

When we wonder why productivity has stopped improving, the obvious suspect is the huge decline in the growth of business investment in new plant and equipment. Giving workers more and better machines to work with is the main way we’ve increased their ability to produce more per hour.

On paper, the commission’s partial switch from conventional company tax to a tax on companies’ net cash flow – which allows them to write off the full cost of new assets immediately – ought to improve productivity.

But the budget’s projected decade of deficits prohibits the Albanese government from giving tax cuts to companies or anyone else. So, while the commission’s plan would cut the tax paid by almost all companies, this cost to government revenue would be recouped by the extra tax paid by the Big 500.

Guess what? Many if not most of those companies pay far less tax than you’d expect. In particular, many of them are the subsidiaries of foreign multinationals using profit-shifting to pay laughably small amounts of tax in Australia.

The commission readily explains that the tax saving to most companies would be covered by tax-dodging foreign companies. Australia’s rare system of dividend imputation (“franking credits”) means that the Australian shareholders of Australian companies get their share of company tax refunded.

Only the foreign shareholders of Australian companies bear the cost of company tax. So why does the Business Council bang on unceasingly about the need to cut the rate of company tax? Because, when it gets down to cases, the Business Council represents the interests of foreign multinationals operating in Australia. That’s its guilty secret.

Footnote. When I wrote last week about the way “modelling” is used to make estimates of the favourable effects of a proposal sound more scientific and reliable than they are, I didn’t know the first offender would be the Productivity Commission, quoting results produced by Australia’s leading commercial modeller, Chris Murphy.

It says modelling suggests its proposal could increase investment by $7.4 billion, Gross Domestic Product by $14.6 billion and labour productivity by 0.4 per cent.

Sorry, no “computable general equilibrium” model can tell you the likely effect of some policy change on productivity. Someone has to insert their best guess at the effect on productivity, and all the model does is calculate what, given a host of other assumptions, such an improvement would mean for GDP.

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We may be short of leaders, but we're not short of false prophets

With this year’s federal budget supposedly brought forward to March 25, the seasonal peak in business bulldust has come early. Last week Canberra kicked off an annual ritual little noticed in real-world Australia, the call for “pre-budget” submissions on what the government should do in its budget.

I’ve never known any of that free advice to be acted on but, as all the participants in the ritual understand, that’s not the point. The point is that it’s a day out for Canberra’s second-biggest industry, the small army of business and industry lobby groups.

It’s an opportunity for them to send a signal to their fee-paying members back in the real world of Melbourne, Sydney and the other state capitals that they’re working their butt off, representing the industry’s interests, whispering in the politicians’ and econocrats’ ears trying to tone down any measures the industry doesn’t like, and rent-seeking as hard as they can go.

In their pre-budget submissions, you see the lobbyists demonstrating their greatest skill: taking their clients’ rent-seeking and repackaging it to make it look as though they want to fix the economy for us all. Consider last week’s first cab off the rank, from the Business Council.

It made five key points, the first of which was that the budget should “get government spending under control”. “High spending levels are contributing to higher inflation, including business costs, and the spending is unsustainable,” we’re told.

Translation: stop wasting money on the “care economy” – care of the disabled, aged care and childcare – including stopping the wages paid to the women who work in these mainly privately owned businesses being so low they can’t get enough workers. Why stop? So you can afford to cut business taxes.

Second, the budget must “cut red tape”. “We must be more aggressive in pursuing a deregulation agenda” like Donald Trump is doing.

Translation: business wants to be free to maximise its profits in any way it sees fit. Any government measures intended to stop business harming its workers, customers or bystanders is “red tape” which can be blamed for business’ failure to do all the wonderful things it keeps claiming it does.

And remember, any time the absence of regulation allows business to blow itself up – as in the global financial crisis – big business wants governments immediately on the job bailing us out at taxpayer expense. We must be allowed to be too big to fail. That is, we must be given a bet we can’t lose.

Third, the budget must “end the energy wars” caused by the “ongoing politicisation of energy”.

Translation: please forget the way business cheered when prime minister Tony Abbott abolished Labor’s carbon tax in 2014 and kicked off a decade of inaction. Similarly, please don’t mention how muted has been our criticism of Peter Dutton’s plan to abandon renewables and switch to Plan B, a government-owned nuclear system, which will take only a decade or two to get going.

Fourth, the budget should “fix our broken industrial relations system” which has “shifted the pendulum too far against employers, making it far less attractive to hire and grow”.

Translation: business liked it much better when the pendulum was too far against the workers and their unions. Everything was going fine in the economy until 2022, when Anthony Albanese began trying to even things up. This is why real wages began falling from June 2020 and the productivity of labour hasn’t improved for a decade.

Finally, the budget should “address our uncompetitive tax system” which is uncompetitive internationally and likely to become more so. This is “a major deterrent to attracting new investment”. We must have a tax system that “helps us rather than hinders us in bringing investment to our shores”.

Did I mention that a lot of the Business Council’s member companies are big foreign multinationals, including producers of fossil fuels? Our mining industry is about three-quarters foreign-owned.

So their local chief executives may speak with an Aussie accent but, on foreign investment and the wonders it will do for our economy, they’re batting for the other side.

The main reform the Business Council has long wanted is a cut in the rate of company tax, paid for by a hike in the rate of the goods and services tax. This, we’re told, would do wonders for the wellbeing of Australia’s punters.

The Business Council would never admit it, but the thing its members hate is our uncommon system of “dividend imputation and franking credits” designed to ensure that company shareholders don’t pay company tax.

Why do the chief executives hate it? Because only local shareholders get franking credits. Foreign shareholders don’t. Why not? Because we want to make sure that, when we allow foreign multinationals to make big profits from mining our minerals or whatever, we Aussies get our fair share of the spoils, including via the company tax they pay.

(That’s assuming they don’t use profit-shifting and other accounting tricks to minimise the company tax they pay. I remember when BHP’s marketing people kept reminding us it was The Big Australian. Their accountants told the Australian taxman it was The Big Singaporean. In truth, BHP is roughly three-quarters foreign-owned, mainly by Americans.)

When Paul Keating introduced dividend imputation in 1987 it was all the rage in other rich economies. But it fell out of fashion, allowing the big economies to follow a different fashion: cutting the rate of company tax to gain an advantage over the others.

The Business Council has gone on for years trying to con our government into joining this race to the bottom. It’s had no success, however, and isn’t likely to. Why? Because our Treasury isn’t that dumb. And because franking credits mean local shareholders (and voters) have nothing to gain from cutting the company tax rate.

And I can tell you this: should some future government be mad enough to do it, no one would ever bother to come back a few years later to see if, as promised, foreign investment had surged. No one’s ever game to audit the arguments for this or that tax “reform”. Why not? The letters BS come to mind.

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How Albanese is tighten up on tax-dodging multinational companies

By MILLIE MUROI, Economics Writer

Earlier this week, a crucial piece of legislation made its way through parliament. It didn’t receive a lot of fanfare, but it’s a long-overdue tweak to our tax system.

You probably know companies such as Amazon, Apple and Microsoft. They’re multinational corporations that make hundreds of billions of dollars in profit every year, some of it right here in Australia – and probably from you as a customer.

Yet, the taxes they pay are not always proportional to the profit they’re pocketing. That’s something laws passed earlier this week seek to change.

Apple raked in an income of more than $12 billion in the 2022-23 period, according to the government’s transparency report. But it only paid 1 per cent tax on that income. How is that possible?

While the company tax rate in Australia is 30 per cent for most businesses with a turnover of $50 million or more, firms can reduce their taxable income and, therefore, the amount of tax they pay.

Some deductions are fair and reasonable: for example, claiming deductions for day-to-day business expenses including materials you need to supply a good or service. Other strategies are … questionable.

A business like Apple may not be breaking the law, but it can take advantage of different tax rates across the world.

Australia’s company tax is among the highest in the world. According to the Organisation for Economic Co-operation and Development, we were only trumped by one country: Colombia, where companies paid about one-third of their income in tax.

By contrast, countries such as Hong Kong, Singapore and the United Arab Emirates have much smaller company tax rates, making them attractive tax havens. Companies can sneakily shift their income to these countries or use cunning tactics to play the system to their favour.

Former economics professor turned Assistant Minister for Competition, Charities and Treasury Dr Andrew Leigh says the share of multinational companies’ profits passing through tax havens has soared. Back in the 1970s, virtually no multinational profits went through tax havens, he says. “Now it’s up to about 40 per cent.”

Stronger reporting requirements and wider availability of data have made it easier to spot when a company is skirting the rules, acting as a deterrent for businesses hoping to fly under the radar with sneaky tactics.

And in 2017, the Australian Taxation Office found itself in a legal battle in the ongoing crusade against companies paying less tax through loopholes in the system, coming out on top against resource giant Chevron.

The Federal Court ruled against Chevron’s use of an arrangement called related-party finance – commonly used by multinationals to reduce the tax they have to pay in Australia.

It’s where the local entity of a multinational firm borrows funds from its offshore counterpart, which sets much higher interest rates than would usually be reasonable. That interest flows back to the offshore part of that company and allows the Australian branch to claim higher tax deductions because interest payments can be a tax-deductible expense.

Chevron’s Australian subsidiary had taken a $4 billion loan from its US parent company to develop Western Australian gas reserves. This added to the local subsidiary’s debt pile, but allowed it to sidestep Australia’s 30 per cent company tax rate, with those interest payments instead being taxed in the US where the corporate tax rate was lower. In 2017, Chevron had paid no company tax in five of the previous seven financial years.

The Federal Court eventually ruled Chevron’s Australian subsidiary should not be allowed to claim interest on its borrowings from the rest of Chevron Group as if they were two standalone companies. In the 2022-23 period, Chevron paid more than $4 billion in tax.

However, Mark Zirnsak, secretariat for the Tax Justice Network, says that ruling has not closed the loophole entirely. Instead, he says Chevron got too greedy. “It’s still legal to claim the interest rate payment to yourself like Chevron did,” he says. “What the ATO contested was the rate of interest.”

Get it? If Chevron had just charged itself a standard rate of interest – similar to a bank – there would have been no issues.

Related party finance is just one of the many tricks multinationals use to dodge the Aussie taxman.

There’s also something called “transfer pricing” which companies such as mining giant BHP have been penalised for. For years, BHP was selling Australian iron ore and coal to its Singapore operation. Now, there’s nothing wrong with that – except that BHP was then selling these commodities for much more from its Singapore marketing hub to other nations.

Since Singapore has a much lower corporate tax rate, BHP was reducing its tax bill despite the coal and iron ore originally coming from Australia.

This week, the Australian government finally joined the growing army of countries – more than 135 so far – that have agreed to a global minimum tax of 15 per cent: A company with more than $1.2 billion in global revenue must pay at least 15 per cent tax across its global operations. Otherwise, the countries they’re doing business in can now get a bite of its untaxed profits.

This is supposed to deter companies from creating artificial structures in low or no-tax territories, such as the Cayman Islands, in a bid to avoid paying taxes in places where they actually do their business.

It’s also supposed to prevent a “race to the bottom” where countries compete for the lowest company tax rates to attract businesses. How? Because if countries charge company tax rates below 15 per cent, then other countries can impose “top-up” taxes.

Australia, for example, can now apply a “top-up tax” on a multinational operating in Australia if that multinational pays less than a 15 per cent tax rate wherever it does business globally.

Zirnsak says the 15 per cent rate is too low, but a positive change for now.

“The Biden administration would have liked to push it higher, and the Europeans were pushing for it to be lower, so at the end of the day, 15 per cent was a compromise,” he says.

“It’s no longer going to be a game where you can simply try and cheat the governments of the countries you’re actually doing business in through your artificial legal structures and working with governments that are happy to assist you in tax avoidance and profit.”

Leigh says the next step for the government is to crack down on tech giants, which have been more difficult to pin down. That’s partly because of the virtual nature of their services which has made taxing them properly an elusive exercise globally.

Of course, it’s a long-overdue change, and there’s lots left to do. But shifty multinational taxation tactics are being squeezed out.

It’s not just the big guys playing sneaky games. But as Leigh says, the local cafe you bought your coffee from today probably doesn’t pay an accountant exorbitant amounts to figure out how to minimise their tax.

“They don’t sit down at their weekly planning meeting and decide which country they want to pay tax in to minimise their tax.”

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Ross Garnaut's new plan to lift us out of mediocrity

If your greatest wish is for the virus to go away as we all get vaccinated, and then for everything to get back to normal, I have bad news. You’ve been beaten into submission – forced to lower your expectations of what life should be bringing us, and our nation’s leaders should be leading us to.

Without us noticing, we’ve learnt to live in a world where both sides of politics can field only their B teams. Where our politicians are good at dividing us and making us fearful of change, but no good at uniting us, inspiring us and taking us somewhere better for ourselves and our kids.

Scott Morrison hopes that if he can get us vaccinated without major mishap and get the economy almost back to where it was at the end of 2019, that should be enough to get him re-elected. He’s probably right. Even his Labor opponents fear he is.

Fortunately, whenever our elected leaders’ ambition extends little further than to their own survival for another three years, there’s often someone volunteering to fill the vision vacuum, to supply the aspiration the pollies so conspicuously lack. Among the nation’s economists, that person is Professor Ross Garnaut, of the University of Melbourne.

In a book published on Monday, Reset: Restoring Australia after the pandemic recession, Garnaut argues we need to aim much higher than getting back to the “normal” that existed in the seven years between the end of the China resource boom in 2012 and the arrival of the virus early last year.

For a start, that period wasn’t nearly good enough to be accepted as normal. Unemployment and underemployment remained stubbornly high – in the latter years, well above the rates in developed countries that suffered greater damage from the global financial crisis in 2008-09 than us, he says.

“Wages stagnated. Productivity and output per person grew more slowly than in the United States, or Japan, or the developed world as a whole,” he says. (If that weakness comes as a surprise to you, it’s because our population grew much faster than in other rich countries, making it look like we were growing faster than them. We got bigger without living standards getting better.)

So that wasn’t too wonderful, but Garnaut argues if that’s what we go back to, it will be worse this time. Living standards would remain lower, and unemployment and underemployment would linger above the too-high levels of 2019.

We’d have a lot more public debt, business investment would be lower and we’d gain less from our international trade, partly because of slower world growth, partly because of problems in our relations with China.

Continuing high unemployment would devalue the skills of many workers, particularly the young. Many of our most important economic institutions – starting with the universities – have been diminished.

The new normal would be more disrupted than the old one by the accumulating effects of climate change and continuing disputes about how to respond to this.

So Garnaut proposes radical changes to existing economic policies to make the economy stronger, fairer, and to treat climate change as an opportunity to gain rather than a cause of loss.

At the centre of his plan is returning the economy to full employment by 2025. That is, get the rate of unemployment down from 6.5 per cent to 3.5 per cent or lower – the lowest it’s been since the early 1970s.

This would make the economy both richer and fairer, since it’s the jobless who’d benefit most. Returning to full employment would take us back to the old days when wages rose much faster than prices and living standards kept improving.

Returning to full employment, he says, would require a radical change to the way businesses pay company tax and the introduction of a guaranteed minimum income, paid to almost all adults at the present rate of the dole, tax-free and indexed to inflation.

It would involve rolling the present income tax and social security benefits into one system. This would benefit people working in the gig economy and other low-paid and insecure jobs, and greatly reduce the effective tax rates that discourage women and some men from moving from part-time to full-time work.

Changing the basis of company tax would cost the budget a lot in the early years but then raise a lot more in the later years. The guaranteed minimum income would cost a lot but would become more affordable as more people were in jobs and paying tax.

Much of the economic growth Garnaut seeks would come from greater exports. Australia’s natural strengths in renewable energy and our role as the world’s main source of minerals requiring large amounts of energy for processing into metals creates the opportunity for large-scale investment in new export industries. We could produce large exports of zero-emissions chemical manufactures based on biomass, and also sell carbon credits to foreigners.

Of recent years, Australia has fallen into the hands of mediocrities telling us how well they – and we – are doing. Surely we can do better.

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We should get a fair share of foreign investors' profits

Australia has been a recipient of foreign investment in almost every year since the arrival of the First Fleet in 1788. Yet for much of that time the idea of foreigners being allowed to own so much of our businesses, mines, farms and land is one many ordinary Australians have found hard to accept.

For older Australians, the thought of “selling off the farm” to foreigners makes them distinctly uncomfortable. Why can’t we do it ourselves and own it ourselves?

The short answer is, we could. But had we chosen that path we wouldn’t be nearly as prosperous today as we are. As the Productivity Commission reminds us in a paper published this week, you need money to set up a business, let alone a whole industry.

That money has to be saved by spending less than all your income on consumption. And had we been relying solely on our own saving, we’d have been able to develop much less of this vast continent than we have done. So, from the days when we were a British colony and had no say in the matter, we’ve invited foreigners to bring their savings to Australia and join us in exploiting the golden soil and other of nature’s gifts with which our land abounds.

Total foreign direct investment – that is, where the foreigner owns enough of the shares in a company to have some control over its management – is now worth about $1 trillion. The largest sources of direct investment are, in order, the United States, Japan and Britain. In recent years, of course, most of the action – and the angst – comes from China.

The less poetic way to put it is that Australia has been a “net importer of capital” for more than two centuries. It’s thus not so surprising that, despite whatever reservations ordinary Australians may have, the dominant view among our politicians, business people and economists has been that we must keep doing whatever it takes to attract the foreign investment we need to keep the economy expanding strongly.

For many years it was felt that we always run a deficit on our balance of trade in goods and services with the rest of the world, so we always need to attract sufficient net inflow of foreign capital to be sure of financing that trade deficit – as well as covering all the regular payments of dividends and interest we need to make to the foreigners who have invested in local businesses or have lent us money.

This mentality made sense in the days when we had a “fixed exchange rate” – when the government, via the Reserve Bank, set the value of our country’s currency relative to other countries’ currencies – particularly the British pound and, later, the US dollar – and changed that value only very rarely in situations where it couldn’t be maintained.

The point is that when you choose to fix the price of your currency, you do have to worry about getting sufficient net inflow of foreign capital to cover the deficit on the “current account” of the “balance of payments”. Should you fail to attract sufficient inflow, you’re forced into the ignominy of cutting the price you’ve fixed.

Now, this problem went away a long time ago. In 1983, after we’d been having a lot of trouble keeping our exchange rate fixed and our balance of payments in balance, we decided to join most of the other advanced economies in allowing the value (or price) of our currency to float up and down according to the strength of the rest of the world’s demand for the Australian dollar (the Aussie, as it’s called in the foreign exchange market) relative to the supply of it.

From that day, the two sides of our balance of payments – the current account and the capital account – were in balance, the deficit on one matched exactly by the surplus on the other, at all times. How? Because the price of the Aussie adjusted continuously to ensure they were.

The “balance of payments constraint”, which had worried the managers of our economy for so long, just evaporated. But here’s the point: the attitude that we must always be doing as much as we can to attract as much foreign investment as possible continued unabated.

There’s this notion that, in the now highly competitive, globalised financial markets, if poor little Australia doesn’t try really, really hard, we’ll miss out.

This, of course, is the reasoning behind the unending push by big business for us to cut the rate of our company tax. Our system of “dividend imputation” means Australian shareholders have nothing to gain from a lower company tax rate. The only beneficiaries would be foreign shareholders because they aren’t eligible for “franking credits”.

We’re asked to believe that how well the level of the nominal rate of our company tax compares with other countries’ rates is the main factor determining whether we get all the foreign investment we need. Not even how the tax breaks we offer compare matters much, apparently.

I don’t believe it. It’s a try-on. As the Productivity Commission’s paper reminds us: “Foreigners invest in Australia because of our fast-growing and well-educated population, rich natural resource base, and stable cultural and legal environment.”

Just so. Mining companies flock to Australia because we have the high-quality, easily-won minerals and energy they need. The idea that global companies such as Google or Amazon would give Australia a miss because our company tax rate’s too high is laughable. Especially when they’re so adept at minimising the tax they pay in advanced countries.

We should take a more hard-nosed, business-like attitude towards foreign investors such as the miners, which make huge profits but employ very few workers. When state governments fall over themselves building infrastructure for them and offering royalty holidays and other inducements, it matters greatly how much company tax they pay before they ship their profits back home.

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Why did Labor lose? Not because of its tough tax plans

It’s been a week since the election so, naturally, by now a great many of the people who work in the House with the Flag on Top – politicians, staffers, journalists – know exactly why Labor lost and the Coalition won: those hugely controversial dividend franking credits.

There were other reasons, of course, but franking credits is the big one. How do I know they know? Because this is what happens after every election.

The denizens of the House take only a few days to decide on the single most important factor driving the result. Surprisingly, each side of politics – the winners and the losers – almost invariably comes to the same conclusion.

And once they have, the concrete around the notion sets quickly and what started as a theory becomes received wisdom, something any fool knows and part of the building’s corporate memory.

Months later, political scientists will come up with different, much more “evidence-based” explanations, but by then it will be too late. No one listens to them because the die has been cast.

Which is why it may already be too late for research by Dr Richard Denniss and others at the Australia Institute to debunk the quite misguided notion that it was all the people who’d be hurt by the franking credits policy voting against an evil-intentioned Labor Party.

When you see Denniss’ quite startling findings it should also disabuse you of the notion that, particularly in a country as big and varied as ours, a party’s loss of an election could ever be, as the academics say, “mono-causal” rather than “multi-factorial”.

Labor’s performance was disappointing (for its supporters, anyway), not disastrous. The composition of the House of Reps has changed surprisingly little. So it may surprise you, but shouldn’t, that as well as there being lots of electorates that swung to the Coalition (measured on a two-party-preferred basis), there were also lots of electorates than swung to Labor.

Get this: the seats that swung to the Coalition were mainly those whose voters had low incomes, whereas the seats that swung to Labor tended to be those whose voters had high incomes.

Among the seats with the 10 biggest swings to Labor were five from Victoria, three from NSW and one each from WA and the ACT. The swings varied from 3.7 per cent to 6.6 per cent.

In all but two of those seats, they had at least twice the proportion of high income-earners (people in the top 20 per cent) than the national average. Under the Coalition’s three-stage tax plan, voters in the same eight electorates are estimated to get tax cuts in 2024 varying from 49 per cent more to double the national average.

Across Australia, the average value of franking credits per taxpayer is $695 a year. In those eight electorates (five of which are held by the Coalition), the average value ranges from $1213 to $2578 a year.

Now let’s look at the 10 electorates with the biggest swings to the Coalition – six in Queensland and four in NSW. The swings varied from 6 per cent to 11.3 per cent. All of the seats had less than the national average of people with high incomes. And for all but one of them, the average tax cut in 2024 will be below the national average.

How much do they get in franking credits? All 10 seats get less than the $695-a-year national average. Between 83 per cent and 16 per cent of the average, to be precise.

Looking more generally, electorates with more people on low and middle incomes tended to swing to the Coalition, whereas electorates with more people on high incomes tended to swing to Labor.

Next, since it’s the (well-off) retired who would have been hit by the plan to end refunds of unused franking credits, the researchers looked at the voting trend for electorates with a high share of voters over 65.

They found only a very slight tendency for such electorates to move their votes to the Coalition.

So, what should we make of all this? Well, for a start, the figures allow us to rule out some possibilities, but leave others open.

They seem to refute the contention that many well-off retirees (or even prospective well-off retirees) moved their votes away from Labor because they were deeply opposed to the planned changes to franking credits.

They leave open the possibility than many less well-off voters moved their vote away from Labor because they disapproved of the way well-off retirees were to be treated. If so, they were being very magnanimous towards people better off than themselves.

Possible, but not likely. It’s easier to believe they (or, at least, some of them) were renters voting against Labor in response to the real estate agents’ scare campaign claiming Labor’s plan to limit negative gearing would force up rents.

Turning to the higher-income electorates, there’s little sign of many people moving their votes away from Labor because of their opposition to its franking credit plan – or to its move against negative gearing, for that matter.

According to Denniss, it looks like renters voted to help their landlords keep their tax lurks, whereas the landlords voted for Labor’s offer of free childcare and the restoration of penalty rates for their tenants.

Well, maybe. What can be said with more confidence is that it’s hard to see much sign of an outbreak of class warfare.

Moving on from Labor’s controversial tax changes, the success or near success of independents running in Liberal seats such as Warringah and Wentworth in prosperous parts of Sydney, and Indi in rural Victoria, makes it easier to believe the swing to Labor in so many high-income electorates was motivated by a concern that Australia needed a more convincing policy to combat climate change.

As for the swing against Labor in many low-to-middle electorates in Queensland and NSW, my guess is they felt Labor was neglecting their worries about jobs and the cost of living.

It’s never as simple as many workers in Parliament House convince themselves.

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If only the Indigenous had the worries of the well-off aged

One thing I hate about elections is the way politicians on both sides seek to advance their careers by appealing to our own self-centredness. I suppose when they know how little we respect them for their principles, they think bribing us is all that’s left.

The federal election campaign hasn’t started officially, but already the one issue to arouse any passion is the spectacle of the most well-off among our retired screaming to high heaven over the proposal that, though granted the concession of paying no tax on income from superannuation, they should no longer receive tax refunds as though they were paying it.

We teach our children to respect the needs and feelings of others, and to take turns with their toys, but when it comes to politics you just get in there and fight for as much lolly as you can grab. And if my voice is louder and elbows sharper than yours, tough luck.

When someone at one of those rallies of the righteous retired had the bad manners to suggest that the saving would be used to increase spending on health and education (and increase the tax cut going to those middle-income families still required to pay tax on their incomes) they were howled down. Health and education? Don’t ask me to pay.

You gave me this unbelievably good tax deal, I paid the experts to rearrange my share portfolio so as to fully exploit it, and now you tell me you’ve discovered you can’t afford it and other people’s needs take priority. It so unfair.

Meanwhile, at the other end of the income spectrum, Scott Morrison delivered a Closing the Gap report to Parliament last Thursday. It was the 11th report since the practice began, following Kevin Rudd’s National Apology in 2008.

Morrison was the fifth prime minister to have delivered the report. The fifth obliged to admit how little progress has been made in achieving the seven targets we set ourselves.

The original targets were to halve the gap in child mortality by 2018, to have 95 per cent of all Indigenous four-year-olds enrolled in early childhood education by 2025, to close the gap in school attendance by 2018, to halve the gap in reading and numeracy by 2018, to halve the gap in year 12 attainment by 2020, to halve the gap in employment by 2018, and to close the gap in life expectancy by 2031.

As you see, four of the seven targets expired last year. None of them was achieved. They’re being replaced by updated – and more realistic – targets.

In his progress report, Morrison was able to say only that two out of the seven targets were on track to be met.

The first of these is the goal of having 95 per cent of Indigenous children in early childhood education by 2025. This was achieved in the latest figures, for 2017, with NSW, Victoria, South Australia, Western Australia and the ACT now at 95 per cent or more.

The other is halving the gap in year 12 attainment by 2020. Morrison says this is the area of biggest improvement, with the Indigenous proportion jumping by 18 percentage points since 2006.

With the key target of life expectancy, the figures show some improvement for Indigenous people from birth, but associate professor Nicholas Biddle, of the Centre for Aboriginal Economic Policy Research at the Australian National University, warns that the figures are dodgy.

So why have we been doing so badly? Biddle and a colleague argue that the original targets were so ambitious they couldn’t have been achieved without radically different policies, not the business-as-usual policies that transpired.

That’s one way to put it. It’s common for politicians to announce grand targets that make a splash on the day, without wondering too hard about how or whether their successors will achieve them. And no one was more prone to such “hubris” (Morrison’s word) than Kevin07.

A second reason, they say, is that successive governments’ policy actions haven’t always matched their stated policy goals. Their employment target, for instance, hasn’t been helped by the present government’s abolition of its key Indigenous job creation program, the community development employment project.

Then there’s the present government’s soft-target approach to limiting the growth in government spending, which has involved repeated cuts to the Indigenous affairs budget, particularly in Tony Abbott’s first budget.

The most significant Indigenous policy initiative in ages, the Northern Territory Intervention – which preceded Closing the Gap, but has been continued by governments of both colours – may have directly widened health and school attendance gaps.

As well as disempowering Aboriginal people in the territory, the immense amount of money and policy attention devoted to the Intervention “could have been better spent elsewhere”.

Third, they say, measures intended to achieve the targets have rarely been subject to careful evaluation and adjustment.

Morrison professes to have learnt these lessons. But, the authors say, if his “refreshed” approach “does not put resources – and the power to direct them – into Indigenous hands, the prospects for closing socio-economic gaps are likely to remain distant”.

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The truth behind the mid-year budget update

Wow. Under Scott Morrison’s inspired leadership, the budget is almost back to surplus and the economy is ticking over nicely. And having brought home the bacon, Santa ScoMo can deliver our reward, scattering little presents from now until the election.

It’s a lovely thought, but the truth is less heroic. An old saying would assess the position outlined in the midyear budget update as: good things come to those who wait. Or, franker: better late than never.

To be boasting about how much better the budget balance is looking is a bit rich, coming from a government that, five long years ago, talked its way into government by claiming we faced a "budget emergency" of debt and deficit that only the Liberals could fix because they had good economic management in their DNA.

After the disastrous political reception to its first budget in 2014, the government made no further serious attempt to reduce the budget deficit, instead quietly resolving to wait until the passage of time caused the economy to strengthen and tax collections to recover.

That’s where it finds itself now. Tax collections have strengthened in the past year or so because heavy infrastructure spending by the state governments and the rollout of the national disability insurance scheme have boosted employment and the number of people paying income tax.

As well, company tax collections are stronger because export prices have recovered a bit, businesses have finally used up their deductions from accumulated losses incurred during the downturn, and because the crackdown on multinational tax avoidance initiated by the previous government is paying off.

Even so, the government’s net public debt has doubled from the $175 billion it inherited in September 2013 to $355 billion this October.

Initially, the government resolved not to cut taxes until the budget was back to significant surplus. Malcolm Turnbull ditched that in his first budget and the government has proposed tax cuts in every budget since.

Had it held the line it could have been back to actual (rather than foreshadowed) surplus today. And it could have shown us a net debt that had already fallen a little, rather than telling us its projections see the debt peaking in June next year.

The first politician to show us a projected return to surplus in the next few years was Julia Gillard in 2010. Since then, the Coalition has had to revise down its own projections countless times. We’ve learnt the hard way not to believe any budget number that’s not an "actual".

The Coalition’s budgetary performance has been ordinary in all respects bar one: over the five years to June 2017, it limited the average real growth in its spending to 1.5 per cent a year.

Very few governments can better that restraint – certainly not the previous Labor government which, despite all the dodgy figures Wayne Swan showed us at the time, ended up with real spending growth averaging 5 per cent a year.

As for Morrison’s claims about how well the economy’s doing, Josh Frydenberg has had to revise down the budget’s forecasts for growth in wages and the economy.

With luck the economy will keep growing reasonably strongly in the coming year or two, but only if it negotiates the housing downturn without mishap and only if wages return to reasonable growth.

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Sorry, small business has no special sauce for jobs

Scott Morrison is surely on a winner with his decision to step up pursuit of jobs and growth by bringing forward the time when small and medium businesses have their company tax rate cut to 25 per cent.

Certainly, it’s likely to be a popular decision, not just with the owners of the more than 3 million businesses who’ll be paying a bit less tax, but also with a lot of ordinary voters.

After all, as everyone knows, small business is the backbone of the economy and its engine room. It’s where most of the economy’s jobs are.

How does everyone know it? Because that’s what politicians – and the small business lobby – keep telling us.

This is why Morrison is so confident of getting the bring-forward passed by the Senate.

Cutting the smaller-business company tax rate to 25 per cent by 2021-22 rather than 2026-27 will have an additional cost to revenue of $3.2 billion over four years.

Only about $1.3 billion of this would be offset by the government’s abandonment of its plan to cut the tax rate for bigger businesses. The rest would be covered by repaying government debt more slowly than previously projected.

There’s likely to be enough cross-benchers keen to push the fast-tracking through – big business may not be judged worthy of a tax cut, but smaller business is - even if Labor isn’t playing ball.

But it seems Labor will be. Why? Because it, too, professes to believe small business is what the economy revolves around.

According to its official policy: “Small businesses make a huge contribution to national prosperity and supporting Australian jobs. Small businesses play a central role in the economy.”

There’s just one problem with all this stuff. It ain’t true.

When you study the facts and figures, there’s no reason to believe small business has any economic virtue not possessed by businesses of any other size. If anything, the reverse.

I’ve spent my whole career as an economic journalist refuting the delusional claims of this or that part of the private sector to be more worthy than the rest of it.

If it’s not small business claiming to be the economy’s engine room, it’s farmers claiming to be the bedrock on which the rest of the economy is built, or manufacturing claiming that making things is more virtuous than doing things (providing services).

There are all those ads telling us it’s mining the country most depends on. (They’re trying to draw attention away from the truth that mining is hugely profitable, about 80 per cent foreign owned, avoids as much tax as possible and employs surprisingly few workers.)

Then there are the exporters claiming that producing things for sale to foreigners is more important than producing things for sale to locals.

Plus, of course, the common delusion that the private sector is “productive” whereas the public sector is unproductive and even parasitic. Do you really think curing the sick or teaching the young – or even directing the traffic – is unproductive? That people in the private sector pay taxes, but workers in the public sector don’t?

It’s all economically illiterate hype. And it’s used to try to justify demands that the government give my bit of the economy a special deal not available to other bits. Economists’ name for it is “rent-seeking”. (Though, as recent events remind us, no one does rent-seeking better than the Catholic schools.)

But back to measuring against the facts the claims that small business has a special sauce when it comes to jobs. It’s complicated by the fact that the usual way of measuring the size of businesses is according to the number of their employees, whereas eligibility for the lower company tax rate is determine by the size of a business’s turnover (sales, not profits).

Morrison says there are more than 3 million businesses with turnover of less than $50 million a year, employing “nearly 7 million Australians”.

If so, that’s more than half of our total “employed persons” of 12.6 million. But about a third of those 7 million would be in medium-size businesses, not small.

According to the latest figures from the Australian Bureau of Statistics, for 2016-17, small business (defined as firms with fewer than 20 employees) has 4.8 million workers, medium-size business (20 to 199 employees) has 2.6 million workers and large business (200 plus) has 3.5 million.

That means small business employs just 44 per cent of the private sector workforce and about 40 per cent of the total workforce.

But just because a sector employs a lot of workers, that doesn’t necessarily mean it's creating jobs faster than other sectors.

Over the two years to June 2017, small business may have had 44 per cent of the existing private sector jobs, but it accounted for only 18 per cent of the growth in jobs.

Overall, private sector employment grew by 2.3 per cent, but small business employment grew by just 0.9 per cent. Combine small and medium and they grew by 2.3 per cent, about the same rate large-business employment growth.

And this during a period when smaller businesses were paying a lower rate of tax, supposedly to encourage them to create more jobs.

Actually, the lack of apparent response shouldn’t be a surprise. The typical tax saving is small. Morrison himself says that an independent supermarket or a pub that makes a $500,000 annual profit would save $12,500 in 2021-22 “to invest back into the business or staff, or help to manage cash flow”.

That doesn’t buy many jobs, nor many pay rises. And since businesses are free to use their tax saving however they see fit, there’s no reason to think they’ll favour more jobs or higher wages. No more than big businesses would.

If Morrison’s on a winner, it’s a political winner, not an economic one.

But if there’s nothing special about small business, why do politicians on both sides keep spreading the sector’s propaganda that it is special?

Because the many more owners of small businesses have far more votes than the relatively few bosses of big businesses do. It's politics, not economics.

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Turnbull changes tune for a lower-taxes election

Q: When is a move to increase tax collections not a move to increase taxes? A: When it’s an “integrity” measure.

The overwhelming purpose of this year’s budget has been to portray the Turnbull government as committed to lower taxes – not like those appalling Labor Party people, who want to whack up taxes everywhere.

Hence Scott Morrison’s seven-year plan to cut personal income tax at a cumulative cost of $144 billion over 10 years.

The government’s determination to push on with cutting the rate of company tax for big business is further proof of its commitment to lower taxes.

Trouble is, Malcolm Turnbull’s true conversion to the Down, Down Taxes Down party is rather recent.

Go back to his previous pre-election budget, in 2016, and he was busy increasing taxes to help pay for his 10-year phase-down in company tax.

If you remember, that budget copied Labor’s plan for four years of huge increases in tobacco excise, introduced the Coalition’s version of Labor’s major cutbacks in super tax concessions to high-income earners, introduced its own version of a tax on multinational tax avoiders and a “tax integrity package” establishing a tax avoidance taskforce.

Turnbull also explored the possibility of doing something to match Labor’s plan to curtail negative gearing, but finally decided that doing nothing would make easier to portray Labor as the high-taxing party.

Coming to last year’s budget, the government stuck with its company tax cuts, but still needed revenue. ScoMo announced a new tax on the five major banks and, from July 2019, an increase in the Medicare levy from 2 to 2.5 per cent of taxable income, to cover the rapidly rising cost of the National Disability Insurance Scheme.

This budget included another tax integrity package, which extended the special reporting requirements on payments to contractors and improved the “integrity” of GST payments on property transactions.

Now this year’s budget. This time a “black economy package” involving “new and enhanced enforcement” and further extension of reporting requirements on payments to contractors.

That’s not to mention a once-off draw-forward of duty on tobacco, “better targeting” of the research and development tax incentive, “ensuring individuals meet their tax obligations” and “better integrity over deductions for personal super contributions”.

All told, these “integrity measures” are expected to raise almost $10 billion over four years – though remember that when the tax man (or Centrelink) estimates that a new crackdown on the crackdown will raise $X billion, we have no way of knowing whether that guess proved to be too high, too low or spot on. Hmmm.

That $10 billion compares with the first-four-year cost of the personal tax cuts of $13.4 billion. But something the media has judged far too conceptual to adequately report is the decision not to go ahead with the 0.5 percentage point increase in the Medicare levy.

Deciding not to do something you hadn’t yet done adds to zilch, doesn’t it? Not if you’ve ever heard of opportunity cost. Nor if you know how budgets are constructed. The change of tune worsens the budget bottom line by $12.8 billion over four years – almost doubling the budgetary cost of the actual tax cuts.

It’s not hard to see why Turnbull lost his enthusiasm for securing the funding of the disability scheme. Bit hard to claim to be the champion of lower taxes when, with the other hand, you’re putting ’em up. (Just as long as the punters don’t notice your third hand adding to the tax system’s “integrity”.)

Equally debatable is ScoMo’s claim to be the scourge of bracket creep. Since the disaster of its first budget cured the government of any real desire to cut government spending, its main strategy for returning the budget to structural surplus has been to sit back and wait for bracket creep to do the job for it.

Had the government been travelling better in the polls that might still be its budget-repair strategy, rather than throwing the switch to fanciful fiscal forecasts.

But with bracket creep pushing up tax bills every year since the last tax cuts in 2012, beware of ScoMo playing a three-card trick: cuts that should be regarded as the partial restoration of past bracket creep being packaged as protection against future creep.

As ScoMo’s three-step, seven-year tax plan now stands, the huge proportion of taxpayers still earning less than $87,000 a year would get a tax cut of $10 a week to compensate them for all the bracket creep they will have suffered during the 16 years to 2028-29.

Don’t get me wrong. I think we should be paying higher taxes to cover the ever-better public services we unceasingly demand. The actions of both sides of politics say they agree with me. It’s just their words you shouldn’t believe.

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Economic case for cutting company tax rate is weak

Most people don't realise it, but we're on the verge of letting foreign multinationals pay less tax on the profits they earn in Australia because we locals don't mind paying higher tax to make up the difference.

Our almost unique system of "imputing" to Australian shareholders the company tax already paid on their dividends means they have little to gain from Malcolm Turnbull's pressure on the Senate to phase the rate of company tax down from 30 per cent to 25 per cent, over about 10 years, at a cumulative cost to the budget of $65 billion.

So what can we hope to obtain in return for our generosity to foreign businesses? Economic theory (which may or may not prove realistic) assumes it would induce them to increase their investment in Australia which, in turn, would increase the demand for Australian workers relative to their supply, thus bidding up their price (otherwise known as wages).

Note that, contrary to all Turnbull's said about his "plan for jobs and growth", the theory does not promise a significant increase in employment – mainly because the theory assumes the economy is already at full employment before the company tax rate is cut.

As my colleague Peter Martin has written, Treasury's updating of its modelling of the theory finds that, after 10 to 20 years, consumer welfare (arising mainly from higher wages) would be $150 per person higher than it otherwise would be.

Doesn't seem a lot.

Apart from the initial benefits of the company tax cut going pretty much only to foreigners, another reason Treasury's modelling has always shown the ultimate benefits to us as being surprisingly small is Treasury's further assumption that the budgetary cost of the cut would have to be covered by some means.

Treasury's consultant modelled several possibilities: by cutting government spending (don't hold your breath), imposing a lump-sum tax (a textbook fav), increasing the goods and services tax, or by letting bracket creep quietly increase income tax (the most likely).

Trouble is, the model's assumption that increased taxes would harm the economy's performance diminishes the good the lower company tax is assumed to do. As Milton Friedman liked to say, there are no free lunches (you'll end up having to pay, one way or another).

So the impression the government and big business are trying to give us (and naive crossbench senators), that only an economic wrecker would oppose a lower company tax rate, is just spin.

As always, every possible economic policy change has costs as well as benefits, which should be debated. I think the case for cutting company tax is weak.

With the government taking such a propagandist line, the most dispassionate advice we've received has come from evidence Reserve Bank governor Dr Philip Lowe, and an assistant governor, Dr Luci Ellis, gave to a parliamentary committee last year.

Lowe pointed out something no other official has mentioned: the main countries are engaged in a bidding war, in which each moves to a lower company tax rate than the others, hoping to pick up a bigger share of the world's foreign investment - before some other country cuts to an even lower rate.

You can imagine how much the world's chief executives love this game and are urging their own government to put in the lowest, supposedly winning, bid.

But the longer everyone keeps playing, the closer we'll come to the point where no country has any company tax to speak of – and no country has any competitive advantage over the others. All we'll be left with is a distorted tax system.

Lowe's point was that we should think twice before we join this mutually destructive game. Why would a tax war be good, whereas a trade war would be terrible?

The proponents' latest argument is that, now the US is cutting its company tax rate to 21 per cent, we'll get little foreign investment if we don't cut our rate from 30 per cent.

What no one seems to have noticed is that the case for a company tax cut has now turned from positive to negative. It's not that we'll gain anything by cutting, but just that we'll avoid losing if we don't.

But you don't have to accept that argument if you don't want to. Behavioural economics reminds us that the proponents have "framed" our choices in a way that favours their case.

They want us to accept without thinking that foreign companies make their decisions about whether or not to invest in Oz solely by comparing the rate of our company tax with other countries' rates.

That is, foreigners take no account of how our special tax breaks compare with other countries' tax breaks, nor any non-tax factors that make investing in Oz attractive (say, we've got better iron ore than everyone else) nor even that they don't have to worry about our taxes because their lawyers know how to avoid paying them.

As Lowe and Ellis explained to the parliamentary committee, the notion that multinationals focus solely on the rate of our tax is highly implausible.

I think all those other factors mean we're unlikely to attract insufficient foreign investment, even though the US has cut to 21 per cent.

But Treasury's been a great worrier about us attracting enough foreign investment for as long as I've been in the game, without there ever being much sign of a problem.

So, what's eating Treasury? My theory is that it hasn't adjusted its thinking since we moved from a fixed to a floating exchange rate in 1983.

What the proponents of a lower company tax rate don't tell you is that, with a floating dollar (and all else remaining equal), the more successful we are in attracting foreign investment – as we were in the resources boom - the higher our exchange rate will be. Is that what we want?

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