How Trump's tax cuts will affect Australia

The Americans' decision to drop their company tax rate to 21 per cent from the start of next year is unlikely to overcome our Senate's resistance to cutting our company tax rate to 25 per cent for big business. Which is no bad thing.

It seems the forces behind the US end of neoliberalism – the distortion of mainstream economics I prefer to call bizonomics (giving big business whatever it wants will be best for all of us) – aren't giving up without a fight.

This US tax bill is a huge win for them, with the company tax rate greatly reduced, plus cuts in personal income tax biased heavily in favour of high-income earners.

To the extent the unthinking populism that helped elect a way-out character like Donald Trump has been provoked by economic factors, the obvious suspect is America's growing inequality.

But Trump's only great legislative achievement in his first year is an act that will worsen inequality.

That the populists have just shot themselves in the foot is no surprise, since the hallmark of populism is wanting to have your cake and eat it - failing to think things through.

Those American business people who aren't populists, but like the sound of Trump's tax cuts, also need to do some thinking through.

Their big problem is that the tax package will cost the US budget almost $2 trillion over 10 years.

Any consequent boost to US economic activity is likely to be short-lived, and any boost to tax collections far too small to much reduce the net cost to the budget, meaning a lot bigger deficits and debt.

The extra government borrowing needed to finance those bigger budget deficits – and to attract funds from foreign bondholders – will force up US interest rates and the US exchange rate. And, because the US is such a big part of the global economy (unlike us), also force up world interest rates.

Eventually, these higher rates will do what higher interest rates always do: discourage borrowing and spending, causing the US economy to slow.

The more so because it's already been growing fairly strongly for some years, with unemployment already down near the rate thought to represent full employment. It hardly needs more fiscal (budget) stimulus.

The US Federal Reserve will worry more about rising inflation pressure, so will start raising its short-term, policy interest rate faster than it has been.

Neoliberals treat it as a self-evident truth that cutting tax rates leads to increased business investment, consumer spending and employment. But only the most oversimplified economic analysis tells you that's guaranteed. In practice there are many other variables.

For instance, if they don't see many profitable opportunities, US companies could keep doing what many have been: returning their (higher) after-tax profits to their shareholders as share buybacks, rather than investing them in business expansion.

However, Trump seems to have guarded against this possibility by including in his package a temporary business investment incentive.

So my guess is that, as well as giving share prices a boost, his tax cuts will lead to some increase in "jobs and growth" – at least for a while.

Now turn back to Oz and whether cutting the US company tax rate to 21 per cent leaves us with no choice but to cut ours to 25 per cent so as to be "competitive", as the government and the Business Council claim.

The big complication in applying analysis from other countries to us is our full dividend imputation system, which means Australian shareholders pay no company tax on their dividends. They thus have little to gain from a cut in the company rate.

This means the cuts we have passed, for companies with annual turnover of less than $50 million a year, probably won't do much to change the behaviour of those companies, since most of their owner shareholders would be locals.

It also means cutting our company tax rate yields benefits only to the foreign shareholders in our companies.

Why would we do such a thing? Especially when our 80 per cent foreign-owned mining industry employs few people, and the company tax it pays (or avoids paying) constitutes a key part of our reward for letting foreigners exploit our natural resources.

The standard answer is that cutting our tax rate would attract more foreign capital, which would generate more Jobs and Growth. The government's own modelling, however, found that the extra jobs would be negligible, while the extra growth would be quite small, and spread over 10 or 20 years.

Now, however, the argument changes: with the Yanks cutting their rate so low, we're in danger of losing our inflow of foreign investment funds. So cutting now wouldn't make us better off, but would avoid us becoming worse off.

Worried? I'm not. This argument assumes the size of the nominal rate of tax a country imposes on foreign investors is pretty much the only factor they consider when deciding where in the world to invest.

This is just silly. For a start, it ignores all the special tax breaks countries offer. A US study has found that our effective rate of tax is much lower than our nominal rate of 30 per cent, and compares well with other countries.

In any case, investing in Oz has a lot of non-tax attractions: our huge endowment of natural resources, our lawfulness and respect for property rights, our rich and well-educated workforce, our English language, our good education system, our good weather and even our good beaches.

So far, we've had no trouble attracting lots of foreign investment, despite our seemingly high company tax rate.

We'd be mugs to start panicking and giving up a lot of tax revenue – and adding to the debt and deficits we used to say was so terrible – before there was any evidence we had a problem.

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We should change the culture of Christmas

Christmas, we're assured, brings out our best selves. We're full of goodwill to all men (and women). We get together with family and friends – even those we don't get on with – eat and drink and give each other presents.

We make an effort for the kiddies. Some of us even get a good feeling out of helping ensure the homeless get a decent feed on the day.

And this magnanimous spirit is owed to The Man Who Invented Christmas, Charles Dickens. (You weren't thinking of someone else, surely?)

According to a new survey of 1421 people, conducted by the Australia Institute, three-quarters of respondents like buying Christmas gifts.

Almost half – 47 per cent – like having people buy them gifts. And 41 per cent don't expect to get presents they'll never use.

Well, isn't that lovely. Merry Christmas, one and all!

Of course, there's a darker, less charitable, more Scrooge-like interpretation of what Christmas has become since A Christmas Carol.

Under the influence of more than a century of relentless advertising and commercialisation – including the soft-drink-company-created Santa – its original significance as a religious holy-day has been submerged beneath an orgy of consumerism, materialism and over-indulgence.

We rush from shop to shop, silently cursing those of our rellos who are hard to buy for. We attend party after party, stuffing ourselves with food and drinking more than we should.

All those children who can't wait to get up early on Christmas morning and tear open their small mountain of presents are being groomed as the next generation of consumerists. Next, try the joys of retail therapy, sonny.

But the survey also reveals a (growing?) minority of respondents who don't enjoy the indulgence and wastefulness of Christmas.

A fifth of respondents – more males than females – don't like buying gifts for people at Christmas. Almost a third expect to get gifts they won't use and 42 per cent – far more males and females – would prefer others not to buy them gifts.

The plain fact is that a hugely disproportionate share of economic activity – particularly consumer spending – occurs in one month of the year, December.

And just think of all the waste – not just the over-catering, but all the clothes and gadgets that sit around in cupboards until they're thrown out. All the stuff that could be returned to the store, but isn't.

At least the new practice of regifting helps. Unwanted gifts are passed from hand to hand, rather like an adult game of pass-the-parcel, until someone summons the moral courage to throw them out.

Still, buying things that don't get used is a good way to create jobs and improve the lives of Australians, no?

Not really. The survey finds only 23 per cent of respondents agree with this sentiment, while 62 per cent disagree.

One change since Scrooge's day is that those who worry most about waste – at Christmas or any other time – do so not for reasons of miserliness, but because of the avoidable cost to the natural environment.

Rich people like us need to reduce our demands on the environment to make room for the poorer people of the world to lift their material standard of living without our joint efforts wrecking the planet.

This doesn't require us to accept a significantly lower standard of living, just move to an economy where our energy comes from renewable sources and our use of natural resources – renewable and non-renewable – is much less profligate.

This is the thinking behind the book Curing Affluenza, by the Australia Institute's chief economist – and instigator of the survey – Dr Richard Denniss.

He says we can stay as materialists (lovers of things) so long as we give up being consumerists (lovers of buying new things). We can love our homes and cars and clothes and household equipment – so long as that love means we look after them, maintain and repair them, and delay replacing them for as long as we reasonably can.

The survey shows we're most likely to repair cars, bikes and tools and gardening equipment, but least likely to repair clothing, shoes and kitchen appliances, such as blenders, toasters and microwaves.

What would encourage us to get more things repaired? Almost two-thirds of respondents would do more if repairs were covered by a warranty. More than 60 per cent would do more if repairs were cheaper. And 46 per cent if repairs were more convenient – which I take to mean if it was easier to find a repairer.

How about making repair work cheaper by removing the 10 per cent goods and services tax on it? Two-thirds support the idea; only 19 per cent oppose.

Point is, there are straight-forward things the government could do to encourage us to repair more and waste less. Were it to do so, this would help restore older attitudes in favour of repairing rather than replacing.

Trouble is, politicians tend to be followers rather than leaders on such matters. So the first thing we need is a shift in the culture that makes more of us more conscious of the damage our everyday consumption is doing to the environment. That putting out the recycling once a week ain't enough.

We could start by changing the culture of Christmas.

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