Analysts question benefit to economy of a business tax cut
Bank chief economists have questioned the benefit to the economy provided by a cut to the corporate tax rate.
Chief economists at Australia’s biggest banks have questioned the overall benefit to the economy provided by a cut to the corporate tax rate, at a time when the country’s biggest companies sit on record high levels of cash and continue to spend billions buying their own shares.
While the economists said Australia’s international competitiveness was at risk if the corporate tax rate remained relatively high, they said a tax cut might not change the unrealistic “hurdle rate” of return for company investment plans.
Benefits of a tax cut would also be dampened by dividend imputation laws, as personal tax rates remained high against a falling corporate tax rate.
It comes as $15 billion Perth-based miner South32 yesterday launched a $655 million share buyback as part of a “capital management” plan.
“Our operating leverage, strong balance sheet and simple capital management framework is designed to maximise returns and reward shareholders as financial performance improves,” chief executive Graham Kerr said.
Malcolm Turnbull has committed his government to reduce the corporate tax rate to 25 per cent over a 10-year period, ahead of May’s federal budget. But corporate Australia appears to have lost its appetite for investment.
At the most recent corporate reporting season last month, cash holdings in the biggest Australian companies rose 11 per cent over the six months to December to $110bn. Dividend payments increased by 7 per cent at a time when profits rose by 36 per cent. Two thirds of companies raised their dividend payouts.
At the same time, a number of S&P/ASX 200 companies announced they would spend a collective $2bn buying back their own shares over the next 12 months, adding to a buyback binge over the past two years from companies who have rewarded shareholders with billions in stock purchase plans while calling for the company tax rate to be lowered to allow greater investment.
“One of the issues with cutting the corporate tax rate is that it really only helps the economy if improved cash flow gets invested and used for employment,” Westpac chief economist Bill Evans said at a Financial Services Council luncheon.
“If it just gets accumulated in cash or goes out the back in dividends, or the buyback of shares, it doesn’t really help the economy. We need a policy stance that provides people with an expectation that growth is going to be lifting.”
Last month, the nation’s largest insurance company, QBE, said it would spend $1bn buying its own shares over the next three years. At the same time, AMP launched its own $500m buyback plan. BlueScope, which a few years ago flirted with collapse, will spend $150m buying its own stock. Coca-Cola Amatil will shell out $350m, Crown Resorts will spend $500m on buybacks and Seven Group launched a $150m plan. Other large buybacks currently running include a $366m plan from Qantas, $425m being spent by electricity provider AGL and $425m from vaccines manufacturer CSL.
Commonwealth Bank chief economist Michael Blythe said with Britain planning to drop its tax rate to 17 per cent and the US planning to cut to 15 per cent, Australia would lose some competitive advantage. He also said modelling tended to show dropping the tax rate was good for the economy and that the gains flowed through to wages.
“Ideally, what you’re hoping to see is businesses plough some of their savings back into capital spending and labour hiring. If that doesn’t happen, then obviously there are fewer benefits,” Mr Blythe said. “Companies are being very conservative at the moment; they don’t want to take on any more risk. If they’re not going to plough it into expansion, then their preferences are to pay it out in dividends or in share buybacks.”
Reserve Bank research shows most companies have hurdle rates for investment — the minimum rate of return on a project — of between 10 and 16 per cent. “That’s a pretty high hurdle in a low inflation, low yield, low return environment,” Mr Blythe said.
Business Council of Australia chief executive Jennifer Westacott said the fact some companies were holding on to cash “only bolsters the argument for a reduction in the company tax rate”.
“Companies are duty bound to deliver the highest possible return for shareholders, which includes making investments that clear the appropriate risk-adjusted rate of return hurdle. Reducing the company tax rate would lower this hurdle,” Ms Westacott said.
National Australia Bank chief economist Alan Oster said lowering the corporate tax rate would help attract more foreign capital into the country and the controversial $50bn budget hit, trotted out by the opposition, would not kick in until the tax cuts in 2024.
But he said most modelling of a corporate tax cut, including that of Treasury, found dividend imputation at a lower corporate rate increased the taxes levied on personal dividend income, which offset the positive effect of a lower company tax rate on the domestic economy.
“The top end of the income distribution table, which pays most of the income tax, finds that their effective tax rate goes up because of dividend imputation,” Mr Oster said.
Menzies Research Centre director of enterprise Andrew Bragg said the government’s tax plan was an important road map for business and even more important to attract foreign investment.
“Cash holdings are high but investment is on strike. Investment is on strike partly because of policy uncertainty,” Mr Bragg said.
“When you’re doing business in a highly regulated economy, tax rates are material. Australia’s senate is stymieing investment.
“A more competitive tax system will drive more investment. That’s something we have to do regardless of the domestic environment.”
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