Is Labor Anti Business?


On Tuesday night I predicted we should get ready for more unhinging in the wake of Wayne Swan’s 2012-13 Budget and it was about six hours before The Australian produced one of the more ridiculous front pages in the dismal history of this once-proud newspaper.

"Smash the rich, save the base" screamed The Australian’s headline, accompanied by a bizarre cartoon by Bill Leak that strayed crazily into totalitarian propaganda.

I won’t rehash the general bemusement at the lurid response from News Limited to what was actually a fairly orthodox and conservative budget by Swan. Luke Ryan wrote a forensic take-down of the woeful effort, while Jonathan Green mourns the departure from public life of politicians courageous enough to demand an informed debate from constituents.

But it is worth discussing the only factual aspect of the anti-budget reaction, which is the disappointment of business groups concerning the government’s decision to abandon the 1 per cent cut to company tax, from 30 per cent to 29 per cent.

That decision saved billions for a government desperate to return to surplus, incidentally helping it to deliver cash payments to welfare recipients and families. But business groups were unsurprisingly critical of the abandoned tax cut.

The Australian Chamber of Commerce and Industry’s Peter Anderson complained that "social policy has usurped the drive to a stronger economy".

"The decision to abandon the company tax cut is dripping with politics and a low blow to the business sector," he thundered.

The Business Council of Australia’s Jeniffer Westacott told the Herald-Sun "the only way to grow the economy is a strong business sector — where will the growth come from now?"

The Australian Industry Group’s Innes Wilcox put out a media release saying "the scrapping of the company tax cut that was to be financed from the Minerals Resource Rent Tax is a major blow to business".

So what was the point of the company tax cut, and are business groups right to be upset?

The promise to cut company tax goes all the way back to the Henry Tax Review and the ill-fated decision by the government to pursue a Resource Super Profits Tax. The idea behind the RSPT was to tax the above-trend profits of big resource projects, while simultaneously giving generous tax breaks for under-performing resource investments in bad times. Some of the money raised from the mining tax was going to be used to reduce the company tax rate, giving industries outside the mining boom something of a respite. The idea was to use the big profits generated by the extraction and sale of non-renewable resources to spread a bit of tax relief around the rest of the economy.

As we know, business groups, especially the mining industry, waged a vicious campaign against the RSPT that played a significant part in Kevin Rudd’s downfall. Even so, everyone wanted the tax cut that was attached to the mining tax. When Julia Gillard negotiated the second version of the mining tax in June and July of 2010 — the so-called Minerals Resource Rent Tax — the end result was still a 1 per cent tax cut to company tax financed by the proceeds of the MRRT.

But the Opposition has always refused to support any mining tax, and hence any reduction in company tax tat might come with it. As a result, the government decided to abandon the tax cut and use the money to get back to surplus instead. The result has been a war of words over who’s more "responsible".

There are some sound economic reasons to reduce business tax. According to many tax experts, the ultimate burden of company tax eventually falls on workers, because higher corporate taxes will be made up, in part, by lower wages. There are also concerns about companies taking their profits overseas through complex transfer arrangements, or simply by packing up and moving.

On the other hand, the case for lower business tax is a lot less compelling than the punchy sound-bites from the business lobby would have you believe. Many Australian business can’t or won’t pack up and leave, and lower company tax rates may well simply flow into higher free cashflows for shareholders, as economist Flavio Menezes pointed out last year.

I’d further argue that because corporation law gives companies the legal status of a "person", corporate tax should follow. The structure of limited liability means that companies can own property, enter into contracts and sequester all sorts of assets inside that legal status. If it all goes wrong, however, companies can declare bankruptcy and the directors and owners won’t be liable for any of that pain. Given that the law treats companies as people, perhaps its not inconsistent to ask those corporations to pay similar levels of tax to ordinary workers — 30 per cent being the tax rate most middle income earners pay.

Is Australian company tax high by world standards, by the way? No, it’s not. Australia’s company tax rates are only just above the OECD average.

In any case, will a tax cut of 1 per cent mean that much? We tend to forget that modern accounting being what is, very big companies making very large profits are not necessarily paying their full rate of tax anyway. Last year, Westpac Banking Corporation paid taxes of $1.455 billion on earnings of $8.514 billion. A simple calculator exercise will tell you that figure is only 17 per cent, far less than the headline figure of 30 per cent that Westpac is "supposed" to pay. NAB reported full year earnings before tax of $7.798 billion. It paid $2.124 billion in company tax — a rate of 27 per cent. Woolworths earned $4.14 billion before tax. It paid $842 million in tax — a rate of 20 per cent.

You get the picture. Compared to the myriad of tax breaks and deductions already open to big companies with sophisticated accounting procedures, the difference between 30 per cent and 29 per cent of a headline tax rate is marginal. And that’s the big guys. For smaller companies and corporations, the difference is proportionately smaller. At the micro-business end of the spectrum, most operating businesses are in fact sole traders who operate by invoicing through an ABN. These businesses are not incorporated and hence don’t pay company tax anyway. They won’t receive any tax break from a reduction in company tax.

Small businesses do in fact get some tax relief from this budget, as this handy PwC cheat sheet explains. One of the most useful is the new "instant asset write-off" which allows small businesses to immediately deduct the value of any asset costing less than $6,500, and $5,000 against the value of a motor vehicle. The idea is to make it easier for businesses to deduct the costs of buying small assets like tools, computers or utes and vans.

We didn’t hear a lot about this provision in the chorus of catcalls from the business lobby. Perhaps that’s because most of the business groups who get talking heads on the television don’t actually represent small business (the Business Council of Australia, for instance, represents only the biggest 100 companies). In general, the arguments advanced by the business lobby tend to be those that exercise the big end of town, rather than the small players.

That’s a shame. Business is an important part of Australia’s economy and society. Australian public life would be a much calmer and more sensible environment if business lobbyists could resist the urge to attack a Labor government at every turn, and instead engage with the realities of the budget situation.

Ben Eltham is New Matilda's National Affairs Correspondent.