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