Hard-working Aussies help pay for company tax cut

I often think Scott Morrison does a remarkably good Joe Hockey impression, but in this budget he's performed a Wayne Swan sleight-of-hand that's better than Swanny ever did.

Consider this. Big business has been desperate for a higher goods and services tax. Why? Because this was the only way the government could afford to grant them their longed for cut in company tax.

So when Malcolm Turnbull balked at increasing the GST, it seemed he wouldn't be cutting company tax either.

When the budget was unveiled, however, we still saw the government committing itself to cutting the company tax rate from 30 to 25 per cent over 10 years, and making an immediate start by cutting the rate to 27.5 per cent for all companies with turnover of less than $10 million a year, from July 1.

For good measure, Turnbull and Morrison threw in a small personal tax cut for the top quarter of earners. How on earth did they afford this without a higher GST?

Over the four years of the forward estimates, the company tax phase-down will cost $5.3 billion. Add $4 billion for the personal tax cut and we have $9.3 billion to account for.

The measures in the "tax integrity package" – which include the Google tax – should raise a net $3.3 billion.

The reforms to superannuation tax concessions will save a net $3.2 billion over the period, and the further hikes in the tobacco excise should raise $5.2 billion, meaning the three big revenue-saving measures will raise a combined $11.7 billion.

This leaves the government – the one so committed to lowering taxation – $2.4 billion ahead on the deal.

Satisfied all is in order? I'm not. Once fooled by Swanny, twice shy.

This government has done nothing but complain about how Labor committed itself to two expensive new spending programs – the national disability insurance scheme and the Gonski school funding – which proved to be "uncosted and unfunded".

What Swan did was stagger the introduction of the two schemes so that they didn't cost all that much in the first four years (the ones shown in the forward estimates) but got a lot more expensive in the following years (which we couldn't see).

Get it? This is the same trick Turnbull is using to hide the unaffordability of his vastly more expensive plan to cut the company tax rate over the next 10 years.

Little wonder he was so reluctant to reveal that the cumulative cost of the company tax "glidepath" was a paltry $48.2 billion.

So we've been told how the first $5.3 billion will be funded, but not the remaining $42.9 billion.

A key figure we haven't been told is the annual cost of the tax cut once it's fully introduced. But Deloitte Access Economics' Chris Richardson's estimate is about $16 billion a year.

Clearly, this is far more than the budget's tobacco excise increase, super reforms and company tax "integrity package" are likely to be able to cover.

In the last year of the forward estimates, 2019-20, those three measures are expected to raise only about $5.1 billion.

So if Morrison can now claim that the 10-year company tax cut phase-in has been costed, can he also claim it's been funded?

He's making the same claim Swan used to make by producing the "medium-term projection" of the budget showing it returning to surplus (in 2020-21, no change from the mid-year update) and staying in surplus until 2026-27.

Trouble is, whereas in last year's budget the government's "budget repair strategy" required it to deliver surpluses "building to at least 1 per cent of gross domestic product by 2023-24", this year's projection shows the surplus plateauing at 0.2 per cent for the last six years to 2026-27.

Why? Because progress in increasing the surplus (so as to pay back more debt) has been sacrificed to covering the ever-growing cost of the cut in company tax.

The cut really becomes expensive in the last three years, when big businesses join the phase-in. You can bet this "glidepath" has been carefully structured to stop the medium-term budget projection looking too sick.

Note too that the medium-term projection assumes tax collections are capped at 23.9 per cent of GDP after 2021-22, with the possibility that any excess is used to fund bracket-creep-returning tax cuts for Morrison's "hard-working Australians".

So the projections purporting to show that the company tax cut can be funded by our settling for seven years of a budget surplus no higher than $3.5 billion in today's dollars, also rely on the assumption of no further personal tax cuts for another six years.

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How the budget stacks up as tax reform

When politicians announce a tax cut to be delivered after they've been re-elected, there are no prizes for guessing it's an electoral bribe. But they never fail to sanctify the exercise by assuring the lucky recipients that the money they're getting will do wonders for the economy.

Malcolm Turnbull is going into this election promising a pathetically small tax cut to the top quarter of taxpayers, which starts – officially, anyway – the day before the election.

Plus a one-sixth cut in the rate of company tax that's to be phased in over the next decade, starting small and ending big.

Company tax will be cut because Turnbull & Co Ava Plan to help Jobson Grothe​.

Which sounds nice. But is it good enough?

Before the last election, Tony Abbott promised to devote his first term to laying the ground for major tax reform. There'd be a full inquiry – with no restrictions on what could be considered – a green (discussion) paper and finally a white paper setting out exactly what the government planned to do in its second term if re-elected.

So we're entitled to view the tax measures announced in the budget against the major renovation we were promised.

How does the budget stack up as an exercise in tax reform? How does it measure up against the two big reform criteria of efficiency and equity (fairness)?

Well, the budget contained five big tax measures, but they don't add up to an integrated whole.

First is the tiny tax cut, which will have an annual cost of about $1 billion, and a combined cost of almost $4 billion over the four years of the "forward estimates" shown in the budget.

Then there's the plan to slowly cut the company tax rate from 30 per cent to 25 per cent, but starting with small business and working up in size, not getting to big business until 2024-25 and reaching the finishing line in 2026-27.

This will cost $700 million in the budget year, 2016-17, rising to $1.7 billion by the last year of the forward estimates, and costing $5.3 billion over the first four years.

We've subsequently been told (reluctantly) that, by 2026-27, the total cost of the phase-in will be just a fraction higher at $48.2 billion. Chris Richardson of Deloitte Access Economics estimates that, by then, the annual cost of the full cut will be $16 billion. Not cheap.

Helping to cover the cost of these personal and corporate tax cuts will be a big rise in the excise on tobacco (raising $5.2 billion over four years), the crackdown on multinationals' tax avoidance (raising about a net $3.3 billion over four years), and the net saving from various reforms of superannuation tax concessions ($3.2 billion over four years).

Let's start with equity: how do the tax measures affect the distribution of income between rich and poor households?

Since the tiny tax cut ($6 a week) goes to only the top quarter of income earners, it's "regressive" (reducing high earners' average tax rate by a higher proportion than low earners' average rate). But, obviously, not by much.

On the other hand, the superannuation changes hit the top few per cent of fund members quite hard, then give about half of those savings to members with lower incomes, particularly women. So, quite "progressive".

Strictly speaking, taxes on tobacco are highly regressive – and getting more so as the better paid give up smoking or never take it up.

But is discouraging poor people from smoking doing them harm? Not in my book.

It's a lot harder than you may imagine to determine whether cuts in company tax and reduced tax avoidance by multinational companies are progressive or regressive.

But I'll unpick that knot on another day so we can move on to efficiency. An economically efficient tax system is one that raises the revenue we need with least distortion of the choices each of us makes about working, spending, saving and investing.

Since most taxes do have effects on our choices, the efficiency objective is about choosing the combination of taxes that does least to affect them.

It's a stretch to imagine the tiny tax cut will have much effect on incentives.

And despite the government's claims about the fabulously beneficial effects of the company tax cut, if you actually read its own modelling you discover the benefits are tiny – and would take 30 years to arrive.

People hit by the super changes will tell you they'd discourage saving, but don't believe them. Their effect – if any – will be on which tax-preferred vehicle wealthy people use for their saving. Studies show high income-earners save a lot of their income regardless of the incentives offered.

But there's a class of taxes that are consciously used to discourage certain forms of behaviour. High taxes on tobacco are an example. So is a tax on emissions of carbon dioxide.

And there's another small class of taxes that can't distort behaviour because they tax only "economic rent" – the profits or other benefits people enjoy that are in excess of the returns they need to keep them doing whatever it is they've been doing.

A good example is a resource rent tax. Another is a tax on the unimproved value of land.

Judged as tax reform, this budget does little to improve efficiency by shifting the mix of taxes away from taxing "goods" (such as work) to taxing "bads" (such as pollution). Nor has it done anything to shift towards taxes than don't distort behaviour.

Though one of its first acts was to abolish a tax on a bad – the carbon tax – and a tax designed not to distort choices – the mining tax – the government has done little to replace them with anything better.

This budget is a plan for jobs and growth? Only at the rhetorical level.

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