Speech on Corporate Tax Cuts and Why They Won't Increase Wages

3.15pm | March 26, 2018

Listening to the responses of those opposite, you would think that the corporate tax cut was the ultimate all-rounder: it can bowl, it can bat, it'll increase wages, it'll increase profitability and it'll increase investment, all without hurting the budget bottom line. I would caution the crossbench to treat these claims with a grain of salt, because a lot of the claims that are being made by the government simply do not stand up to scrutiny.

Take the claim by the Prime Minister this weekend that there would be an extra $750 in the pocket of the average Australian full-time worker if the government's corporate tax cuts were passed by the Senate. I want to spend a little bit of time exploring what this means, because, the way the Prime Minister says it, it sounds as though if we pass the legislation Australians will have cash in their pocket by Christmas. Now, even on the most optimistic modelling by the government, this is not the case. It's not $750 per person a year; it's $750 on average across the entire economy at some yet to be determined point in the future. I know this because Treasury Secretary John Fraser was asked about that $750 estimate in Senate estimates this year. He explained that it did not refer to an annual increase in wages per worker; it referred to the estimated level lift in wages that would occur across the economy once the tax cuts had been fully phased in and investment in Australia had increased as a result of companies responding to those tax cuts and there was an increase in productivity growth as a result. He did not say how long it would take for that process to run its course—and fair enough, because that sequence of events is almost impossible to estimate with any certainty. It's also difficult to tell whether any of those steps will happen. They are based on highly variable assumptions about company behaviour and Australian and global economic conditions.

If you are after a guarantee that the tax cut will increase wages, you are not going to get it. They can't give it. That is simply not what their modelling tells them. It is not what their modelling is based on. And it's probably why the Business Council of Australia's letter also ducked the question about wages and instead talked in very general terms about investing more. Adobe CEO David Mendels explained why this is the case. He said:

As a CEO and member of the Board of Directors at a public company, I can tell you that if we had an increase in profitability, we would have been delighted, but it would not lead in and of itself to more hiring or an increase in wages. Again, we would hire more people if we saw growing demand for our products and services. We would raise salaries if that is what it took to hire and retain great people. But if we had a tax cut that led to higher profits absent those factors, we would 'pocket it' for our investors.

That's the truth. That is really the dynamic in the package that's been put before the Senate. What is proposed in no way guarantees a flow-through to investments and productivity that will lead to job increases and in no way guarantees a flow-through to wages. This is simply not the way that business decision-making actually works.

Nobody from government can credibly tell anyone in this chamber that the tax cuts will go straight to wage rises. It's not what their modelling says. It's not what business is saying. It's not what economic research says. But there is one exception. An intriguing piece of research came out recently showing that companies that pay no corporate tax are also more likely to pay their CEOs an average of around a fifth more than firms of similar size and circumstances that do pay company tax. So there might be something in this claim that wages will go up—because there is some evidence that they will go up for CEOs, but not for average Australians who are doing it tough.

You can watch the speech here.