Tax and energy costs drive business offshore
12 January 2018
By Nyunggai Warren Mundine AO
I've lost count how often I open a newspaper and shake my head at Australia's political leadership vacuum.
Tax and energy policy are prime examples.
Despite good efforts by Finance Minister Mathias Cormann and backbencher Craig Kelly, the Coalition struggles to communicate why lowering company tax rates to 25 per cent is good for Australia. And Labor's doing a great job opposing it with populist rhetoric, claiming company tax cuts are "giveaways" with negligible benefit.
Companies aren't like human beings. They don't need money for food or shelter. They exist because they're a useful vehicle for humans to pool resources to do business. The money a company retains from lower company taxes can only be used in two ways: distributing more to shareholders; or operating and growing the business by hiring more employees and/or purchasing more goods and services, property and equipment. So lower company tax means more income for superannuation funds and self-funded retirees, more jobs and more business opportunities. The economy grows.
Every one of these payments is also taxed. Shareholders pay tax on dividends. Foreign shareholders pay withholding tax. Employees pay tax on wages. Suppliers pay tax. GST is collected on the sale of goods and services. Lowering company taxes doesn't stop tax collection. It delays it, allowing companies to use the money in the meantime.
I've heard senior Labor politicians (seemingly) confused how cutting taxes helps the economy. US economist Arthur Laffer explained it very simply. If you keep increasing tax on an activity eventually the activity decreases because it becomes uneconomical. So as tax rates go up, at some point total tax collections start to decrease. Think about it. If you taxed companies 100 per cent, most would close and none would aim to make profit. And they wouldn't attract investors. So no tax would be collected.
New Zealand lowered its company tax rate by 2 percentage points in 2011. Company taxes paid in 2016 were 59 per cent higher than in 2011. The challenge is staying under the point where the tax rate starts to disincentivise business.
We're past that point in Australia now. Australia's top company tax rate is one of the highest in the world. The OECD average is 25 per cent. UK is 19 per cent. And the US has lowered its rate to 21 per cent.
International companies weigh the pros and cons of different countries when deciding where to operate. Developed economies like Australia, Western Europe and the US are more expensive because of higher wages and property costs and greater regulation but have advantages like stable government and mature legal and banking systems.
Australia has no great advantages over other developed economies. Why set up in Australia if you can pay 10 percentage points lower tax in the US or UK? We must reduce company tax or lose jobs and business opportunities. It's that simple.
The second area is energy policy.
Australia has the 10th most expensive electricity in the OECD and rising. Electricity is also increasingly unreliable. This makes Australia unattractive for business. Already we've lost many high electricity usage industries like smeltering and recycling. Manufacturing is going too.
There's no standalone electricity market in the world the size of Australia's that generates over 20 per cent from wind and solar. Yet our renewables targets will require 30-40 per cent wind and solar. Gas is in short supply because states have banned gas exploration. Meanwhile, global demand for gas as a transition fuel has soared, as have prices. Coal plants are closing at a rate of one per year. Nuclear energy is banned.
Countries like China and the US can offer reliable and cheaper electricity. China builds hydroelectricity dams without activist disruption. Its nuclear capacity will increase 70 per cent by 2020; nearly tripling again by 2030. It has a 300GW pipeline of new coal plants and 922GW already in operation. China will double emissions by 2030 in complete compliance with the Paris agreement. The US is the world's largest nuclear power producer. It has a booming gas extraction industry which has secured energy supply, helped keep electricity prices down and reduced emissions. The US has now exited the Paris agreement.
And what's Australia's answer to unreliable electricity? The Australian Energy Market Operator recently asked 14 large-scale companies to power down during a heatwave. Known as demand management, it's AEMO's solution to prevent blackouts. Only bureaucrats would think paying businesses not to do business is a good idea. It means they purchase less, produce less and roster fewer staff. What a joke.
Some people think governments do a better job spending money than the private sector. I don't. But one thing is certain: Australia will collect zero tax from companies that don't operate here at all.
This article was first published in the Australian Financial Review on 11 January 2018.