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Polity: Company tax cut-and-slash-and-burn!

Written By: - Date published: 4:38 pm, August 4th, 2014 - 24 comments
Categories: act, Economy, tax - Tags: , ,

polity_square_for_lynnReposted from Polity.

So ACT – party of liberating the poor, don’t you know – has a new plan to liberate the poor by slashing taxes on company owners. Sure, company owners tend not to be poor themselves but, you know, trickle down.

Naturally, National-backer David Farrar is delighted. Could this be the softening up for a post-election “ACT only gets one thing, although it is quite large”?

But, surprise of surprises, the devil is in the detail and the numbers don’t stack up.

1. The numbers lie

The current company tax rate is 28%. As DPF points out, Treasury estimates each 1% cut in the rate costs the government around $220 million a year. So the total cost of this policy is in the region of ($220 million * (28-12.5)), which is $3.4 billion a year. That is a little over a third of the total company tax take, gone.1

So how will ACT fund this $3.4 billion hole? Here’s Andrew Vance:

He would fund the tax cut by slashing “corporate welfare,” worth about $1.5bn a year, and carbon trading, worth $164m.

Oops! $1.5 billion + $164 million doesn’t so much add to $3.4 billion.

2. The End of Corporate Welfare? Yeah, right.

We have all seen this movie before. “We are opposed to corporate welfare!” intones every politician, ever.

But then a company sidles up and says “Hey, nice scenery you’ve got here. We’d love to make a movie but your labour laws are too tight?” OK, OK, make an exception for them. But only them!

Then another says “You sure have a nice aluminium plant. Wonder what it would look like in mothballs? Profit margin just isn’t high enough.” Alright, just slip them a few bucks. Them, and no more!

“Who likes convention centres? You do? We’d build one, but only if these gambling laws over here kind of fall away.” You see the pattern.

Anyone who thinks ACT could hold National to “no corporate welfare” in exchange for a corporate tax cut is entirely dreaming. What you would have is less company tax coming in, and just about as much corporate welfare going out.

It’s all for the benefit of the poor, you see.

3. Attempted proof-by-academic-study-intimidation

Jamie Whyte is a former academic, so he waves academic studies around to try and silence his critics. But I am also a former academic, so I can spot this bullshit a mile off.

Whyte knows as well as I do that these are hugely contested areas of economics. I am sure the studies he cites saying “GDP growth will double!” or “almost all the money will go to wages!” actually exist. But he knows full well that there are other, just as reputable studies that find massively smaller impacts of company tax rates on GDP growth, and find massively smaller impact of company taxes on wage rates. As a self-styled pursuer of the unvarnished rational truth, Whyte must struggle with his reflection at times like these, when his financial backers force him into selective story-telling and obfuscation as a sans to line their pockets further.

  1. Yes, a more than 50% cut in the tax rate can result in a less than 50% cut in the tax taken, because companies can use the extra cash they have on hand to generate higher profits. Note well, however, that this particular magic trick is used at this point in the calculations, so can;t be used again alter…

24 comments on “Polity: Company tax cut-and-slash-and-burn! ”

  1. minarch 1

    its classic “street” economics

    the bait & switch ….

  2. Wayne Mapp 2

    Quite a few sensible countries (other than Somalia) have relatively low corporate tax rates. So it is not quite the absurd proposition that Polity and Salmond seem to think it is.

    I suspect it might be the key point of discussion in any coalition discussion between the Nats and ACT. For instance a rate of 25% would be credible outcome. It has a cost of around $660 million. It would ensure our corporate tax rate is lower than that of Australia, which is always a key consideration for policy makers, whether they are left or right.

    There is a lot of research that indicates that lower corporate tax rates attracts more productive investment. So over time the lost revenue is made up by the increased economic activity.

    And given the two posts on The Standard, there must be a sense that this is a real debate.

    • Liberal Realist 2.1

      “Quite a few sensible countries (other than Somalia) have relatively low corporate tax rates.”

      As well as some dubious tax havens…

      “There is a lot of research that indicates that lower corporate tax rates attracts more productive investment. So over time the lost revenue is made up by the increased economic activity.”

      Ireland is a great example of what a lower corporate tax rate can attract. Do you suggest we become the international tax racket of the south?

    • One Anonymous Bloke 2.2

      Gosh, research! Does it explain why per capita GDP is always higher under Labour governments, with their higher corporate tax rates? Since you mentioned productivity.

    • RedBaronCV 2.3

      Wayne again! If he is here then it is unlikely to be:
      -a sensible idea
      -and assumes ACT will win Epsom

      What it does tell us is that this tax cut is actually Nact’s agenda but Nact want to hide behind and blame ACT. Spare me the negotiation idea Wayne – that’s just spin.

      Isn’t it time that Nact actually came out with some policy beyond a few million to reverse a tiny bit of previous savage cuts and money for provincial roads because regional councils sensibly declined to spend millions on roads used by a few large trucks.

      Where’s your policies NACT?

    • Lanthanide 2.4

      Our income tax rates are lower than Australia too (well, except for their tax-free bracket), and yet tons of kiwis have been moving over to Aus…

      Maybe tax isn’t that big a deal after all?

    • tricledrown 2.5

      Wayne Mapp your full of crap evidence please we have had this argument before and when you look at overall tax and cost of health-care housing for the poor social welfare benefits their are virtually no countries that have low taxes they are just hidden to make their economies look good!
      Wayne you should get your facts Right or don’t bother making an idiot of yourself.
      eg the US most states have lower personal income tax but by the time you add health-care costs, land taxes,tamp duties ,CGT ,state taxes most states in the US pay way more tax than we do Idiot !

    • tricledrown 2.6

      Crappy comparison geeze wayne Australia has higher personal taxes so we should increase personal taxes on upper incomes good idea Wayne doh!
      some states have CGT others have land taxes whats it going to be wayne half truths again you pain wayne can’t have both ways.

    • millsy 2.7

      How much services would you cut Wayne?

      In the 1990’s dozens of hospitals were closed around the country, the majority of them in provincial areas, and services cut/privatised to enable to government to cut taxes in 1996.

      You cannot cut taxes without cutting services (that serve the most vunerable in society).

      That is a FACT.

    • Draco T Bastard 2.8

      It would ensure our corporate tax rate is lower than that of Australia, which is always a key consideration for policy makers, whether they are left or right.

      More race to the bottom BS from the RWNJs.

    • Tracey 2.9

      25% won’t do Wayne. It must be 0%. I only say this because some right wing commentators here say that if a rise of $5 an hour on minimum wage is good, why not $100 an hour. So, to follow that |logic”, company tax must drop to 0%.

      I agree that such a drop will attract investment, my concern is about the promised returns. You have still been unable to answer my question from months back about when the median wage can be expected to grow, and by how much, following out entry into the TPP.

      Roger and Ruth promised trickle down. Admittedly they only promised a trickle, but it never really trickled, not sure it even dripped.

      Nice to see you using the Standard as a measure of things requiring “real debate”.

  3. Dialey 3

    Income redistribution: An inverse Robin Hood approach used by governments such as across the board tax decreases and capital gains reductions that essentially take money from the poor and give to those in need – the super rich

  4. Steve Wrathall 4

    Labour/Greens seem to endorse the notion that low company taxes encourage growth and jobs- for the winners they want to pick this week, e.g. wood processors, solar panel manufacturers. ACT is just saying, if you accept that principle, why not apply it to every business, and let you the consumer decide which businesses thrive or not.

    • mickysavage 4.1

      You mean the ones that damage the environment as well as those that protect the environment?

    • Armchair Critic 4.2

      You might be on to something with that last bit about ACT being unthinking reactionaries, SW. Applying the principle to other fields (not incest though, even though it’s a sure fire vote winner, right?), if the voters decide that ACT doesn’t thrive, do you think the financial backers of ACT should give up funding political parties?
      Or will ACT’s failure be due to human frailties. I mean how likely is it that a tiny 1%er party would attract a money fraudster (Huata), a stealer of dead baby’s identities (Garrett) and an electoral fraudster (Banks); that’s just bad luck. No way it could due to an outright bankrupt ideology that attracts the most corrupt, immoral and idiotic people that can be found, both as voters and representatives?

      • Lanthanide 4.2.1

        You forgot perk-“buster” Rodney Hide, who liked to take his girlfriend on expensive taxpayer-funded trips.

    • Draco T Bastard 4.3

      for the winners they want to pick this week, e.g. wood processors, solar panel manufacturers.

      In the most successful countries it’s the governments that have been picking winner. Computers and high tech in the US, similar in South Korea and, of course, China. Government seems to be far better at picking winners than private enterprise in fact. Has to do with the fact that they can spend decades supporting the necessary research whereas the private sector demands immediate returns.

      • tricledrown 4.3.1

        DTB command economies Draco China has trained economists to research the best path foward and has logterm plans which include buying up anything it needs to meet those goals .
        Meanwhile New Zealand has a real plonker the double dipping dipstick who had to work all the god given hours at university to pass his degree.
        who is in charge of doing fuck all planning just leave to the market she’ll be Right.
        If this carries on much longer we will be tenants in our own land because China has a long term plan its economic growth will continue to surpass ous making it cheaper every year to buy up our resources and make profits for China confining us to being a commodity producing country ie.third world developing country status

  5. infused 5

    Even I don’t know how this would work.

    Most small businesses try not to make a profit anyway.

    Getting rid of the provisional tax is a much better idea. I seem to remember that’s now happening?

    • Tracey 5.1

      I suspect the four aussie banks would be very excited to be able to take even more money out of the country. Infused, getting the company rate lower than personal tax rate would see, imo, a shift of small companies to maximising profit not minimising. In the case of small businesses this would amount to an income tax cut, a huge one.

    • Draco T Bastard 5.2

      Getting rid of the provisional tax is a much better idea. I seem to remember that’s now happening?

      With the coming of IRD’s new computer IIRC – and it’s about time.

  6. john 6

    Polity and most left wingers here seem ignorant of what happens with company tax.

    When I get paid dividends from companies I own shares in, or from my own company, the company tax is taken off, then EXTRA withholding tax is taken off to bring the total tax rate up to my personal rate.

    So for dividends it doesn’t make any difference at all whether company tax is the same as the personal rate, or set at zero – either way I have to make up the difference to bring it up to the personal rate, so the government take the same amount no matter what.

    And over 80% of profits from NZ companies are given out in dividends. So the only difference is to the much smaller portion of company profits that are reinvested.

    • Colonial Viper 6.1

      Overall your comments are spot on – but only as far as they go.

      And over 80% of profits from NZ companies

      “NZ companies” being a key phrase. As you know, there are a lot of ways that small business people maximise their business expenses/offset income in order to reduce taxable profits, and for large overseas corporates trying to minimise the amount of NZ tax they pay. The large banks have of course been caught running such schemes.

      Basically, SMEs have to be separated from large corporates as the latter have the resources to run complex tax minimisation schemes that the former usually do not.

  7. john 7

    I agree we need to do more to catch tax cheats – there was $132m in the last budget for IRD to hire more staff to catch tax cheats, which according to Key would specifically be aimed at the corporate sector and those with high net wealth.

    The point is that when company profits pass into personal hands (and the vast majority of them do), they are taxed at the personal rate minus what has already been paid.

    So company tax rate for the 80% of profits that get paid our is irrelevant – it makes no difference to govt tax take if it is 0% or 30%.

    What it does do is encourage MORE reinvestment back into growing businesses – which means more jobs, and overall HIGHER tax take from gst and paye.

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