Donald Trump's US tax cut: What it means for Australia

Australian Stock Markets

The pace just picked up, the sense of urgency heightened.

That's the message emanating from Canberra over the need for corporate tax cuts after the US House of Representatives finally pushed through Donald Trump's massive tax bill, his first major legislative victory.


Under the new law, federal corporate taxes in the US will be slashed from 35 per cent to just 21 per cent.

During this week's mid-year budget update, Treasurer Scott Morrison repeatedly hammered home the point that the US push made it an imperative that we follow suit.

Without tax cuts, he said, global corporations would be unlikely to invest here, which would hurt employment and wages.

On paper, it looks like a solid argument. The problem with that analysis is that it assumes all nations measure their statutory corporate tax rates in exactly the same way. They don't.
It also assumes companies base their investment decisions around the world solely on the statutory corporate tax rate.

And it draws a direct link between corporate taxes and wages, that cutting the statutory tax rate leads to higher wages. It may, but the link is weak.

Let's start with the first problem of measuring company taxes. The US charges companies 35 per cent tax. Right? Wrong. America actually charges far more, around 39.1 per cent.

That's because companies operating in the US have to pay state taxes as well. That doesn't happen here. So, if the US cuts its federal rate to 21 per cent, adding in those state taxes will bring its real statutory rate to around 25 per cent, narrowing what appeared to be a wide gap with Australia's 30 per cent.

There are other problems too. All countries offer tax concessions on a wide variety of things. Then there are differences in the way they treat depreciation — how quickly you can write down the value of an asset. Or where you source your finance.

When you factor tax concessions and accounting practices into the equation, our average corporate tax rate is just 17 per cent, making Australia one of the lowest corporate tax countries in the developed world. And if you look at the effective tax rate — the rate most companies use when deciding on whether to invest — our rate is just 10.4 per cent, way below America's even after the tax cut.

The biggest impact, therefore, from America's corporate tax cut is that a proportion of that money will be repatriated back to the US. How much is anyone's guess. Mr Trump, who is well known for hyperbole, is guessing $US5 trillion will be returned.
The Aussie company pays the ATO the full 30 per cent tax rate. The ATO then refunds local investors their share of the tax via what's known as franking credits.

So there are no benefits of a corporate tax cut to local investors, only to foreign corporations and investors.

Treasury reckons the proposed cut will boost GDP by 1.2 per cent, although that's over 20 years.
The Grattan Institute's John Daley and Brendan Coates rightly point out that just because you get a lift in economic activity, it doesn't necessarily make Australians richer, particularly when the tax benefits flow disproportionately to foreigners.

Given those foreigners would have financed their Australian investments offshore, a large slice of the profits also would leave the country.

Even Treasury concedes that our Gross National Income — the payback Australians receive from the corporate tax cut — will rise by just 0.6 per cent in the long term. That's not much. And we haven't even begun to consider the cost to the budget.