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Company tax cuts lift  jobs growth, study finds


The Australian - Adam Creighton

Businesses that received the first wave of the Coalition government’s company tax cuts created jobs 24 per cent faster than those who missed out, according to a landmark study that boosts the case for extending the cut to all companies.

Ahead of a federal budget expected to feature further tax changes, analysis of the financial decisions of more than 69,000 businesses found those that enjoyed a 1.5 percentage point cut in their company tax rate in 2015, worth $2900 on average, put more than a fifth of it into hiring workers and boosting wages.

A little over a quarter went ­towards new investment and 51 per cent was kept in reserve, according to the largest analysis of its kind undertaken by AlphaBeta on behalf of accounting firm Xero.

Small Business Council chief executive Peter Strong said he was shocked more than 51 per cent didn’t go towards cashflow. He said the study strengthened the government’s case to cut company tax to 25 per cent for all companies.

“Basically half of the cut went to wages or growth or investment,” Mr Strong said. “That’s a real sign of the economic potential of this government policy.”

He said bigger firms, thus far excluded from the tax cuts, were more likely to use them to hire workers and to lift wages. “Cashflow isn’t such an issue when you’re bigger,” he said.

The Turnbull government’s signature economic reform — the phased reduction of the company tax rate by July 2026 — has been blocked by Labor and the Greens in the Senate for almost two years.

From July this year, the lower company tax rate, now 27.5 per cent, will extend to companies with turnover up to $50 million, the maximum under current law.

The Business Council of Australia recently ramped up efforts to get crossbench senators and the public on board, calling for its members to contribute to a campaign fund. Qantas chief executive Alan Joyce yesterday confirmed the airline had contributed $200,000.

“We’re very much supporters of the BCA and believe it has to be out there supporting actively the case for corporate tax cuts,” he said. “If the corporate tax rate is not competitive and investment is drained out of this country, which it will be, then all of our customers will suffer, and that will have a terrible effect on confidence.”

Labor has seized on the ­financial misconduct exposed at the financial services royal commission to argue against the tax cut, promising to reverse any ­cut legislated before the next election.

The AlphaBeta study found companies with turnover just below the $2m threshold to receive the first round of cuts increased employment by 2.6 per cent over the two years from July 2015, compared with 2.1 per cent for those with turnover just above.

Andrew Charlton, director of AlphaBeta and a former senior economic adviser to Kevin Rudd in his first stint as prime minister, said there was “so much heat and light” about the impact of company tax cuts, but it was all based on abstract modelling and a few surveys. “This is real evidence from real companies,” he said.

The study also found an unusually low share of businesses with turnover just above $2m and a higher share just below, suggesting restricting the scope of the corporate tax cuts had had perverse consequences for business behaviour.

“Incorporated firms below the $2m threshold increased their ­employment by more than unincorporated firms of a similar size,” the report said. “The ultimate impact of company tax cuts on domestic shareholders is mitigated by dividend imputation, so the effect of tax cuts may be more significant for larger businesses if their share of foreign ownership is higher.”

The government, which in March fell short by a handful of votes of legislating the second round of tax cuts, worth more than $30bn over a decade, is expected to keep the measure in the budget.

The study found that 3 per cent of the tax cut went towards higher wages for current employees, compared with 19 per cent for hiring extra workers. This reflected the broader trend of stagnant wage growth and strong jobs growth. Dr Charlton said the modest impact on wages in the first years didn’t mean wages wouldn’t rise over time.

A separate survey of 502 Xero customers found 34 per cent weren’t aware there had been a corporate tax cut. “Little data and analysis have been available up until this point on (whether) they’ve actually made an impact,” Xero chief executive Trent Innes said.

Image Credit: AAP Media