Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Economics References Committee
24/04/2018
Commitment to the Senate issued by the Business Council of Australia

BREHENY, Mr Simon, Director of Policy, Institute of Public Affairs

WILD, Mr Daniel, Research Fellow, Institute of Public Affairs

[11:39]

CHAIR: Thank you very much for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so, and then we'll open it up for questions.

Mr Wild : Thanks for the opportunity to appear before this inquiry. I'd like to start by saying that I believe Australia is one of the greatest nations in the world, but it didn't become great by accident. It became great because of the culture, the infrastructure and the institutions that were passed down and built up by previous generations. And it became great because previous generations consciously strived to ensure that what they left behind was greater than what they had. It is a moral imperative that the next generation of Australians have the same opportunities to succeed and to prosper as the previous generation. But short-sighted public policy is selling out the future for the present, and nowhere is this more manifest than with declining levels of new business investment in Australia.

New business investment in Australia is just 12 per cent of GDP which is below the rate that prevailed during the economically hostile Whitlam era. A key driver of Australia's declining new business rate is Australia's high business tax rate, and Australia's business tax rate is high no matter which way we look at it. The top marginal rate of 30 per cent is well above the OECD average of 25 per cent and above comparable nations like the US, where it's 21 per cent, and the UK, where it's scheduled to drop to 17 per cent. The effective tax rate which accounts for deductions is 26 per cent compared with the global average of 16.3 per cent, according to PricewaterhouseCoopers. The corporate tax to GDP rate is 4.3 per cent, which is well above the OECD average of 2.7 per cent, and corporate tax as a percentage of total tax is the highest in the OECD—15.3 per cent compared to the OECD average of eight per cent.

Cutting Australia's high corporate tax rate will deliver a range of benefits to Australians. In understanding who benefits from the cut, it's important to first understand that businesses do not exist independent of the shareholders, customers and employees of which they are comprised. It is these groups who pay the tax, and it's these groups who will benefit from a tax cut. Cutting business tax in Australia will obviously make Australia a more attractive place in which to invest, and this will see more capital flowing here. This will include investment into Australian shares and into existing Australian businesses, helping them grow. And investments create new businesses in Australia, which will increase competition. Workers will benefit from new investment through more capital, which will raise labour productivity through capital deepening and put upward pressure on wages. Consumers will benefit from lower prices. Cutting the business tax rate will raise after-tax profits. This will encourage more businesses to come to Australia, which will increase competition and put downward pressure on prices.

Shareholders will benefit. Some of the benefit of higher after-tax profits will flow through to shareholders as either higher dividend payments or higher share value. This includes the 15 million Australians who compulsorily hold a superannuation account. All up the best available evidence suggests that cutting the corporate tax rate to 25 per cent will increase GDP by around one per cent permanently—about $17 billion in today's dollars each and every year. Again, according to the best available evidence, households can expect to receive around two-thirds of the benefits through higher real wages while the remaining one-third is expected to accrue to shareholders.

I would also briefly like to address the terms of the inquiry itself. The inquiry refers to an undertaking made by private businesses in relation to a public policy. Decisions which businesses make around remuneration, pricing and investment are the preserve of those businesses. Businesses are not communal property to be intervened with at will by government. Management of businesses should be directing their time on how to improve the quality of their products and services, rather than constantly answering to government officials on such matters. Businesses should not have to answer to politicians repeatedly. They should answer to their customers, shareholders, employees and suppliers. Every minute that representatives of a business spend before the Senate is a minute they're not dedicated to the core functions of that business, the cost of which is most heavily felt by customers, workers and shareholders.

Cutting the business tax rate should be thought of as an investment in Australia's future. The government's proposed measure to reduce the company tax rate by five percentage points over 10 years is a modest proposal and the minimum necessary to reverse the trend of declining new business investment and deliver prosperity and opportunity into the future. Thanks again for the opportunity to appear here, and we would be happy to take any questions you may have.

CHAIR: You're welcome, Mr Wild, even if this is a highly questionable endeavour today, in accordance with your submission. I note you also say that this is an abuse of government power. As the chair of the committee, I must say that I'm surprised by that type of language, and I might say that the inference that can be drawn from that is that parliament has no right to question what companies are going to do in terms of this commitment—a commitment which was freely given. It wasn't extracted by the government or the parliament. Are you suggesting that the Australian people have no right to have further information about what this commitment means?

Mr Wild : They have a right to. The issue here is the efficacy of such undertakings because there are costs to bringing business representatives before inquiries. As I say, that detracts from them spending time on their core business functions, like looking at their products or their services or attending to their employees and their future investment decisions. Certainly, I wouldn't question the right of the Senate to ask those questions, but it should be noted that there are costs to such undertakings.

CHAIR: Some would say that it's the job of the elected representatives of the Australian people to inquire into these things. You don't agree with that?

Mr Wild : Certainly, you can inquire into these things. Again, I'm not questioning the right or the ability to do that, but there are costs to doing it. Getting businesses and business representatives to answer to politicians necessarily distracts from them answering to their consumers, their employers, their shareholders and their suppliers.

Mr Breheny : I also think you'd be naive not to see the message that this sends to participants in the public debate. I think the idea that you make an undertaking in the course of a public debate and then you have to come before a panel of senators to explain yourself is surely not how we want to conduct debate in a free and prosperous liberal democracy like Australia. I think it's extraordinary.

CHAIR: That's fine. It's only $65 billion, so let's just take everybody's word for it!

Mr Breheny : But this is not an inquiry explicitly into the tax itself or into the bill. This is an inquiry into the Business Council of Australia's commitment. That's an entirely different thing.

CHAIR: You don't think that the commitment goes to some of the benefits that would flow from the tax cut?

Mr Breheny : Certainly, but I think holding a Senate inquiry into something that a business representative organisation has said in the course of the public debate is an intimidatory tactic, and I don't think it's something that we should see in a country like Australia. I think there are serious freedom of speech implications from this.

CHAIR: So this is a Star Chamber; is that what you're saying, Mr Breheny?

Mr Breheny : I've just said I think there are freedom of speech implications. This will no doubt have a chilling effect on companies and individuals participating in the public debate, knowing that there's a threat that they might be called before a Senate inquiry. You don't think that there's any threat at all to individuals participating in the public debate and appearing before you, knowing that there's a risk that they might be called before you?

CHAIR: This is quite extraordinary. You're saying that parliaments around the world are not entitled to—

Mr Breheny : No, we haven't said that.

CHAIR: In the US, it's quite common for companies to explain their position in relation to important public policy matters.

Mr Breheny : Sure. I'd apply the same freedom of speech principles in that context as I do in this. At no point have we said that there is no right of the Senate to call an inquiry of this kind. I just think you would be naive not to understand the implications of calling such an inquiry.

CHAIR: That when significant tax revenues are at stake here—

Mr Breheny : There's a difference—

CHAIR: we're not entitled—or that the cost associated with the holding of this inquiry today is something that should honestly be brought into account?

Mr Breheny : As I've said, you're not making a relevant distinction between the policy itself or the bill that's currently before the Senate and the undertaking that has been made by the Business Council.

CHAIR: Let's agree to disagree on that.

Senator KENEALLY: Are you intimidated being here today, Mr Breheny?

Mr Breheny : No.

Senator KENEALLY: Do you feel your freedom of speech is curtailed?

Mr Breheny : No, but it's not about me.

Senator KENEALLY: You raised the point, so I'm trying to probe it a bit.

Mr Breheny : I'm raising the point that I think—the IPA participates in public debate every day, but not everyone does. I think that raising the threshold, which is what you're doing, for people to participate in the public debate by holding an inquiry of this kind is inappropriate.

Senator KENEALLY: You do acknowledge that we're here because the BCA wrote to the Senate.

Mr Breheny : Sure.

Senator KENEALLY: Voluntarily.

Mr Breheny : Yes. But many organisations write to the Senate, write to the parliament, write to individual members of parliament—

Senator KENEALLY: The Senate didn't ask for this letter.

Mr Breheny : Sorry?

Senator KENEALLY: You understand that the senators did not ask for this letter.

Mr Breheny : Sure. How many inquiries are you conducting this year into undertakings that have been made in the course of public debate?

CHAIR: It's our job to ask the questions, Mr Breheny, so—

Mr Breheny : I'm just—isn't there a role—

Senator KENEALLY: I'm on a number of inquiries, Mr Breheny. If you were in the BCA's shoes, do you think that they should have written the letter?

Mr Breheny : It's up to them. If they want to write a letter of this kind and they want to participate in the public debate, I think that's a good and worthy thing for them to do. They're a representative organisation. It's incumbent on them to participate in the debate in the way that they choose on behalf of their members.

Senator KENEALLY: Let me put this to you. The BCA wrote to the Senate asking us to forgo $65 billion in revenue and giving us a two-sentence, vague—

Mr Breheny : They asked you to forgo $65 billion in revenue? That's a strange thing to ask.

Senator KENEALLY: They asked us to pass the company tax cuts; that's what the net effect of that is. They asked us to forgo this revenue. They gave a vague, two-sentence commitment to the senators of their own free will, and, somehow, it is your contention that, as senators, we should not inquire into that or ask them more about it.

Mr Breheny : No, I didn't say that. You're free in your own capacity as an individual, senator, to question whatever you like. I think there's a distinction between you doing that in an individual capacity and using the Senate as a political tool in the way that you are by establishing this inquiry.

Senator KENEALLY: Haven't businesses used the BCA as a political tool—

Mr Breheny : The BCA is a private organisation. It's—

Senator KENEALLY: by getting them to write to senators to give this commitment?

Mr Breheny : I just answered your question. It's a private organisation. They're not using the powers of the state to intimidate their political opponents.

Senator KENEALLY: So the BCA writing to a letter to senators is not intimidatory, but the Senate holding an inquiry is?

Mr Breheny : Yes.

Senator KENEALLY: Interesting. What's your view of the original draft of the letter as it was reported in the media?

Mr Breheny : I haven't seen that.

Senator KENEALLY: You haven't seen the draft?

Mr Breheny : I didn't see an earlier draft of the letter, no.

Senator KENEALLY: It was reported in the media quite extensively.

Mr Breheny : I'll take your word for that.

Senator KENEALLY: There were a number of clauses in it that members of the BCA refused to sign up to regarding investing more in rural and regional Australia and in terms of hiring more Australians. You haven't seen that? That's pretty extraordinary—the Institute of Public Affairs not keeping up with public affairs in that way. Let me guess then, based on your evidence: would you describe the BCA's intervention in this debate as having negative effects on public debate on economic freedom?

Mr Breheny : What do you mean by negative effects?

Senator KENEALLY: Are you concerned that the BCA's intervention in this debate will lead to more inquiries of this type—more pesky senators asking questions of companies as to what they would intend to do if they received a company tax cut?

Mr Breheny : I hope not.

Senator KENEALLY: You hope it doesn't lead to that, but do you concede that the BCA's letter is why we are here today?

Mr Breheny : No. The Senate's decision to pass a motion asking for an inquiry to be established is the reason we're here today.

Senator KENEALLY: But we only passed that motion because we received a letter from the BCA.

Mr Breheny : Do you pass such a motion when you receive all letters?

Senator KENEALLY: When we're talking about $65 billion of forgone revenue.

Mr Breheny : That's the threshold? The point at which you're talking about $65 billion of forgone revenue you have an inquiry?

Senator KENEALLY: I think it's an important one.

Mr Breheny : I don't think it's a very principled approach.

Senator KENEALLY: What I am trying to get to is that you seem to be wanting to put the blame on senators for asking questions about what companies are going to do—

Mr Breheny : I've never said that.

Senator KENEALLY: if they get a company tax cut, whereas we are only here today because the BCA took a voluntary decision to make this commitment to senators.

Mr Breheny : Yes, they did.

Senator KENEALLY: I'm back to my original question to you. Do you think that was a wise idea by the Business Council of Australia?

Mr Breheny : Yes.

Senator KENEALLY: You think it was wise for them to do that?

Mr Breheny : To represent their members by sending a letter in the course of public debate to decision-makers? Yes.

Senator KENEALLY: To make a commitment that, if the Senate does X, they will do Y?

Mr Breheny : It's up to them the form that they take, but I think that participating in the public debate by presenting evidence and writing letters is what the Business Council of Australia is established to do. I feel like we're going around in circles.

Senator KENEALLY: And going back to Senator Ketter's point, you seem to be contending that we senators should just take them at their word and not make any further inquiry.

Mr Breheny : Again, I didn't say that.

Senator KENEALLY: Then what are you saying. What is your complaint about this inquiry?

Mr Breheny : I don't know why you have to mischaracterise what I've said.

Senator KENEALLY: I'm trying to understand what you're saying. What is your complaint about this inquiry?

Mr Breheny : I've said a few times what my issues are. I think that there's a chilling effect that comes from having a Senate inquiry into a statement that's made in the course of public debate.

Senator KENEALLY: It wasn't just a statement; it was a letter to the Senate.

Mr Breheny : As I said, it doesn't really matter to me what form it takes. The letter to the Senate is a way of making a public statement in the course of public debate.

CHAIR: Before I hand over to the deputy chair, can I just ask: what do you think is the value of the commitment?

Mr Breheny : What do you mean by that? Do you mean: what is the value to you?

CHAIR: Earlier witnesses have described it as a pile of rubbish. CIS has indicated that it's worth very little. Professor Swan made the point that it's not worth the paper it's written on—he agreed with that contention. What do you say it's worth?

Mr Breheny : I don't know to be honest.

CHAIR: The Institute of Public Affairs doesn't have a view about that issue?

Mr Breheny : It's a strategic question I guess. Are you asking: does it help or hinder the case for tax cuts? I think it's neither here nor there. There are a number of different ways that the BCA could've gone. They could've made an ironclad, concrete commitment about increasing the wages of every one of their employees by 10 per cent. Would that have been more helpful? Sure.

CHAIR: Would that've been truthful?

Mr Breheny : I don't know. That's a business decision on behalf of their members. I can't make a decision about that one way or another.

CHAIR: You said, in your words, that the commitment is neither here nor there, is that—

Mr Breheny : Sure. Yes.

Senator HUME: I might bring the questioning back to the IPA's position on company tax cuts themselves rather than the inquiry. Can I ask you first whether the IPA believes that Australia needs international investment to continue its economic growth trajectories?

Mr Wild : Absolutely. I think that the best evidence we have is clear that reducing company tax in Australia will make Australia a more attractive proposition for international investors.

Senator HUME: When we compare like nations how does Australia's current company tax rate compare?

Mr Wild : It's extremely high on a number of different ways of measuring it. When we look at the top marginal rate of 30 per cent it's well above the US, which is 21 per cent, and the UK, which is looking to drop its rate to 17 per cent. When we look at the amount of tax that comes from business profits as a percentage of GDP this is much higher than the OECD average. When we look at the effective tax rate, which accounts for deductions, again, this is much higher than the global average. So no matter which way we look at the company tax rate in Australia, it's far higher than what we have in other jurisdictions who are competing for capital. There's only so much capital to go around at any given point in time and Australia's high tax rate is a serious deterrent to that.

Senator HUME: And it's the relativities that are important as opposed to the number itself?

Mr Wild : Absolutely. If you're an international investor, if you're a major business looking at where you're going to expand a business—where you're going to set-up a new product chain and where you're going to invest in capital—there are a lot of factors that go into this. One is Australia's rigid industrial relations system, which is a deterrent; another is Australia's $170 billion red tape impost and another is Australia's high business tax rate, that's going to serve as a deterrent to businesses coming here and they'll go somewhere else.

Senator HUME: If you could expand on that a little bit further, what are the risks to Australia's international investment, or incoming investment, if the full enterprise tax plan isn't implemented?

Mr Wild : The main risk of keeping our high tax rate is that it's essentially going to reduce the amount of economic opportunity that young Australians have in the future, and that's the main concern. As I say, there is a lot of public policy that's discouraging free enterprise from flourishing here to the extent that it might. The tax rate is one of those. If you maintain a higher tax rate we're going to see full borne job creation and lower wage growth than would otherwise be the case. We're going to see less technological innovation and we're going to see less competition in the Australian market, which is going to have a negative effect on prices and a negative effect on the quality of services that're provided. So there are many ways in which our high tax rate, if it's maintained as it is, would permeate through the economy. Cutting it to 25 per cent is a measure that would help generate some of those benefits I've outlined. As I said, I think it's a relatively modest proposal and it's something that should be easily accommodated in the context of the Senate's priorities.

Senator HUME: The opposition have intimated that they would potentially repeal any company tax cuts that've already been implemented, should they ever get into government. Have the IPA done any analysis on the effect of that?

Mr Wild : We haven't undertaken any specific analysis of that potential undertaking. Any reversion to a higher tax rate is going to, again, discourage business investment and we'll be back where we started. For foreign investors it's going to make Australia a less certain investment proposition as well, because even in the event that taxes are cut the benefits of those taxes won't be fully realised if there is the realistic, and high probability, prospect that they will be repealed in one, two, three, four or five years time.

Senator HUME: It's not unreasonable, is it, for the company to sense that if its cost of capital is lower, or its cost of doing business is lower, it would increase its investment in its own businesses? It's a reasonable assertion to say, 'If my cost of capital is lower or the costs of doing business are lower for me, I will invest more in my own business'?

Mr Wild : I think that's right. I think there are a variety of ways in which increasing after-tax profits and increasing the return on capital will flow through, and one of those is through profit retention and reinvestment in business, which will help those businesses grow and also help improve their share value. As I mentioned in my introductory statement, that will flow through to the 15 million Australians who compulsorily hold a superannuation account.

Senator HUME: So the letter from the BCA to the Senate is not unreasonable? It said that its member companies would increase investment in their own businesses should company tax cuts pass, should their cost of doing business decrease.

Mr Wild : I couldn't comment on the specific businesses that made that undertaking.

Senator HUME: But businesses in general?

Mr Wild : With businesses in general, I think, that's a fair comment. Again, that's what the best available evidence, whether it's from Treasury, the IMF or the World Bank, demonstrates: increased business investment clearly has these flow-on benefits through profit retention, which will increase businesses' investment back into their own business, increase wages growth and increase technological innovation and other such matters.

Senator STORER: I was interested in your discussion of the profit-shifting evidence—the extent of profit shifting being affected. In my mind there is a lot of discussion about the benefit of a reduction in profit shifting from the move from 30 to 25 per cent, yet you quote empirical work that shows it would be minimal. Would you therefore say that any discussion of the move from 30 to 25 per cent aiding a reduction in profit shifting is not correct?

Mr Wild : I think it will have an effect. It's difficult to quantify the extent of that effect. The empirical evidence I was quoting is based on what currently happens. Multinational firms operating in high-tax jurisdictions, like Australia, only shift about two to four per cent of their profits to lower-tax jurisdictions, and I suspect some of that is as a result of Australia's relatively high tax rate. Certainly if you reduce Australia's tax rate compared to those of other nations that will be, as I said, a true tax integrity measure in the sense that it's going to discourage any profit shifting that does take place. The magnitude of that is likely to be modest, and again that's because the government's proposal is relatively modest as well.

Senator STORER: So the magnitude even in the proposal is modest profit shifting?

Mr Wild : The current extent of profit shifting is modest, and any reduction is likely to be modest as well.

Senator STORER: Okay. That will be of interest to me in later discussion. I was also very interested in your discussion of the revenue loss from the tax cut, the third to last paragraph in the discussion. It goes to the point of the direct revenue loss recouped through secondary effects, such as higher wages. You say that to achieve revenue neutrality the remaining 50 per cent should come from reducing government spending. I'm quite concerned with regard to the government debt, as I think you would be as well, and the pressure that this change would place on that. As we heard this morning, the benefits are vastly reduced if it's funded by bracket creep, particularly in employment, which becomes negative, and real wage growth, which goes from 0.96 to 0.29. Are you effectively saying that a corporate tax cut must have a concomitant reduction in spending when it's introduced?

Mr Wild : I wouldn't say it must as an ironclad, necessary guarantee to make it a beneficial public policy on the whole. Certainly considerations about public debt are very important, but the reductions in debt and deficit should come from reduced spending. Spending growth has been increasing year on year and governments should be looking at reducing spending and reducing spending growth in order to get the budget under control, rather than trying to confiscate more money from Australian businesses and families.

Senator STORER: If they didn't cut spending and they introduced this measure then that would increase the government debt and you would be quite alarmed by that?

Mr Wild : I wouldn’t quite be alarmed by it. All taxes destroy wealth creation and all taxes destroy prosperity, but the corporate tax is a particularly pernicious tax. That's been made clear from the Henry tax review, the IMF, the Treasury and the RBA: the so-called marginal excess burden of the tax, which is how much economic activity is destroyed by raising an extra dollar of the corporate tax, is quite large compared to other taxes. You need to take into account any forgone wealth creation that takes place as a result of Australia's very high reliance on the corporate tax. Reducing our reliance on the corporate tax, a very destructive tax, is going to have longer benefits that permeate throughout the economy.

Senator STOKER: I understand the US is Australia's largest investor. It has investments totalling, I believe, $860 billion. What's likely to happen to this investment coming from the US, given the currently dramatic difference between the company tax rate in Australia and that of the United States at 21 per cent?

Mr Wild : Some of that's going to be displaced. Some of that investment coming to Australia will be discouraged, again because of the relative tax differences. Anything that Australia can do to reduce how relatively unattractive Australia is to invest in compared to the US or any other country is going to help ensure that a large amount of capital still from the United States.

Senator STOKER: You've explained in your submission that there's a myth that company tax cuts are unaffordable. Can you explain to the committee what you mean by that?

Mr Wild : The issue is in the framing of the discussion about the affordability of company tax cuts, with the implication that, by providing company a tax cut, the government is providing a handout or a subsidy to businesses. It's important to correct that because it presupposes that government owns the pre-tax wealth of Australians, and of course we'd all be in servitude if that were the case. So it's important to frame it that, by having a tax cut, the government is confiscating less of someone else's wealth. Framing it as affordable or unaffordable conjures up the image of spending, whereas it's not a spending item; it's about taxing less. I accept that the budgetary implications are the same, but it's important to make sure that the framing of this is correct. Governments don't own our wealth; we own our own wealth and the government confiscates a share of it every year.

Senator STOKER: Thank you, Chair.

Mr Breheny : One other thing that might be important to note is that it's a strange claim in the context of company tax receipts going up over the next few years. They'll increase from $71 billion in 2016-17 to $97 billion in 2019-20. That's in an environment where the modelling has been put in place by the Treasury, in the context of this tax cut going through the Senate. Even in that environment, where the company tax rate decreases, receipts for company tax revenue are still increasing over the forward estimates.

CHAIR: Thank you. Mr Wild and Mr Breheny, are you familiar with the national survey that was conducted in the US by the Atlanta branch of the Federal Reserve in relation to business responses to the Trump tax cuts?

Mr Breheny : Not off the top of my head.

CHAIR: There seems to have been some surprise about the reaction. I have no further questions. Thank you very much for appearing before us today.

Mr Wild : Thank you.

Mr Breheny : Thank you very much.

Proceedings suspended from 12:08 to 13:01