Don’t worry about tax cuts for jobs; it’s done al­ready in Ber­muda!

NT News - - BUSINESS -

ALAN KOHLER

THE log­i­cal ex­ten­sion of the idea that com­pany tax cuts pro­duce jobs and growth is that the use of tax havens un­cov­ered this week in the so-called Par­adise Papers is just more of the same!

The Aus­tralian Trea­sury re­cently re­leased some mod­el­ling that pur­ports to show that a 5 per cent cut in the com­pany tax rate, as pro­posed by the Coali­tion, will per­ma­nently in­crease the size of the econ­omy by 1 per cent, re­sult­ing in 45c in the dol­lar of the tax cuts com­ing back in “growth div­i­dend”.

Two prob­lems with that: What about the other 55c? If only 45 per cent of the money lost is re­cov­ered from growth, is the rest pure hand­out to com­pa­nies at the ex­pense of gov­ern­ment ser­vices or higher taxes for in­di­vid­u­als? In return for what? Cam­paign do­na­tions?

The whole no­tion that com­pany tax cuts ben­e­fit the econ­omy cre­ates a sup­port­ive en­vi­ron­ment for tax havens. If gov­ern­ments want to cut my tax bill in the national in­ter­est, then fun­nelling my prof­its through Ber­muda to achieve the same re­sult must be in the national in­ter­est too! I’m cut­ting my com­pany tax for the good of so­ci­ety.

Ac­tu­ally, make that three prob­lems: Trea­sury mod­el­ling is usu­ally wrong.

In the US the Repub­li­can Party has ac­tu­ally called its tax re­form bill the “Tax Cuts and Jobs Act” to drive the point home to any com­pa­nies that are won­der­ing whether to use tax havens or not. The Repub­li­cans and Trump are as­sert­ing that much of the $US1.5 tril­lion cost of cut­ting the com­pany tax rate from 35 per cent to 20 per cent will be re­cov­ered through a growth div­i­dend.

Face­book, Ap­ple, Glen­core, Uber, Nike, Wal-Mart, Siemens, Al­lianz, McDon­ald’s and all the other com­pa­nies named in this week’s leaks from the Ber­muda law firm named Ap­pleby are in­dus­tri­ously do­ing their own ver­sion of the Tax Cuts and Jobs Act. (You’re wel­come, Amer­ica).

Mean­while the hun­dreds of jour­nal­ists por­ing through the 13.4 mil­lion Par­adise Papers doc­u­ments over the past few months have been strug­gling to come up with any de­cent sto­ries — in­deed Four Cor­ners on Mon­day was re­duced to spend­ing half the pro­gram talk­ing about the fight over pop singer Michael Hutchence’s es­tate. Apart from that, it’s been all about US Com­merce Sec­re­tary Wil­bur Ross’s con­nec­tions to Vladimir Putin’s in­ner cir­cle, and the cu­ri­ous story about the Queen us­ing a tax haven for £10m (she doesn’t pay tax).

The jour­nal­ists have had to re­sort to that stuff be­cause they couldn’t find any­thing il­le­gal in the doc­u­ments: the use of tax havens is or­di­nary, ev­ery­day work for the world’s big cor­po­ra­tions and rich peo­ple, or rather their lawyers. It’s just what they do, be­cause they can, and they owe it to their stake­hold­ers.

Note that all of the po­lit­i­cal ou­trage about the Par­adise Papers rev­e­la­tions has come from left-wing politi­cians; con­ser­va­tives are keep­ing their heads down be­cause ou­trage over com­pa­nies re­duc­ing their tax might seem, well, a touch hyp­o­crit­i­cal from peo­ple try­ing to re­duce com­pany tax.

The Trea­sury pa­per that con­tained the growth div­i­dend mod­el­ling was mainly about the im­pli­ca­tions of the US cor­po­rate tax cut for the rest of the world. It con­cludes that if it gets through, other na­tions will be forced to cut taxes to avoid cap­i­tal flight and a re­duc­tion in their own “jobs and growth”. The prob­lem for Aus­tralia is that our tax rate is 30 per cent — 5 per cent be­low the Amer­i­can rate. If the Repub­li­cans re­ally do suc­ceed in cut­ting the US rate to 20 per cent, and the Coali­tion suc­ceeds in cut­ting the Aus­tralian rate to 25 per cent, our rate will end up 5 per cent above theirs, in­stead of be­ing be­low it, as it is now.

So we’ll be stuffed. What is the Turn­bull gov­ern­ment’s Plan B for jobs and growth when our tax rate moves from be­ing 5 per cent be­low Amer­ica’s to 5 per cent above it?

Some­thing more fun­da­men­tal is re­quired, per­haps, than a de­struc­tive international race to the bot­tom, com­bined with whack-amole ap­proach to catch­ing tax evaders, while wait­ing for leaks from Ber­muda law firms.

Much of this week’s Trea­sury pa­per about US cor­po­rate tax re­form was taken up with a dis­cus­sion about “des­ti­na­tion-based cash flow tax­a­tion”, which would the­o­ret­i­cally in­tro­duce two changes. Tax is im­posed where the goods and ser­vices are sold, rather than where they are pro­duced. It would elim­i­nate tax havens and en­tails a bor­der ad­just­ment — ex­port rev­enues are ex­empt from tax, im­ports are not de­ductible.

It taxes cash flow rather than profit, that is the dif­fer­ence be­tween cash in­flows and out­flows, in real time, as they hap­pen. That means cap­i­tal ex­pen­di­tures are de­ducted im­me­di­ately rather de­pre­ci­ated over time.

In fact, the orig­i­nal Trump/Repub­li­can tax re­form plan pro­posed a des­ti­na­tion-based tax sys­tem, in­clud­ing a bor­der ad­just­ment to pay for the com­pany tax cut.But as Trea­sury notes in its pa­per: “In July the ad­min­is­tra­tion and Repub­li­can con­gres­sional lead­er­ship in­di­cated that ‘while we have de­bated the pro-growth ben­e­fits of bor­der ad­justa­bil­ity, we ap­pre­ci­ate that there are many un­knowns associated with it and have de­cided to set this pol­icy aside in or­der to ad­vance tax re­form’.” In other words, they dropped the means of pay­ing for the tax cut, but went ahead with it any­way, re­ly­ing in­stead on the spu­ri­ous growth div­i­dend.

Hap­pily, the com­pa­nies sell­ing stuff in the US are do­ing their bit by “pro­duc­ing” the goods and ser­vices in Ber­muda, Ire­land, Nether­lands etc, and/or groan­ing un­der the weight of mas­sive debts from sub­sidiaries lo­cated in those places so they can send bags of in­ter­est pay­ments there. They are, in short, get­ting out ahead on tax re­form.

So don’t worry about tax cuts for jobs and growth. It’s done al­ready! What, there’s no jobs and growth hap­pen­ing? Funny about that.

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