Company Tax Cuts Will Make The Rich Richer

Dressing them up as a pro-worker policy is probably the Coalition Government's only hope to get the plan through the Senate.

As the debate over company tax cuts comes down to the wire, the Coalition Government has stepped up its counter-intuitive argument that the biggest winners will be Australian workers, not companies. We’re not doing this to help the corporations, they say: we’re doing it for the battlers. Yes, we’ve heard the complaints about insecure jobs, underemployment, and record-slow wage increases.  And we’re going to fix it by giving $65 billion over the next decade to employers.

The politics of this approach make a desperate kind of sense. Expensive tax cuts for companies are a tough sell when the budget is in deficit, other spending priorities are pressing, and an “anti-elite” populism is shattering traditional political allegiances. So dressing up company tax cuts as a pro-worker policy is probably their only hope to get the plan through the Senate.

But the economics are far-fetched. To believe that company tax cuts will push up wages, we must accept several assumptions about company and macroeconomic behavior that range from dubious to downright incredible.

Last week, Finance Minister Mathias Cormann took the argument an extra mile, suggesting the Government was cutting company tax because “we want the bargaining power of workers to increase.”

Workers need more power to win higher wages, he acknowledged – a surprising admission that all is not perfect in the labour market. But the best way to help workers win higher wages, he said, is not to strengthen minimum wages or support enterprise bargaining: it’s to cut company taxes.

Minister for Finance Mathias Cormann. (AAP Image/Mick Tsikas)

In fact, if you truly believe in efficient markets and supply and demand, there is no such thing as “bargaining power.” Competition is supposed to ensure every willing worker is employed and paid fairly (according to their productivity). Bargaining power is not a relevant concept in this idealised supply-and-demand equilibrium.

So by merely admitting that bargaining power matters, Mr Cormann took a big step away from orthodox faith in the virtues of self-adjusting market forces.  And he’s not the first establishment figure to flirt with this heresy. The Reserve Bank Governor Philip Lowe has also acknowledged that the erosion of traditional labour market institutions has weakened the bargaining position of workers (both individually and collectively), contributing to the unprecedented weakness of wages over the past five years.

However, once you admit the importance of economic power, it becomes difficult to cram the idea back into Pandora’s Box – and Mr Cormann’s desperate pitch may cause more problems for his government than it solves. If bargaining power for workers is a good thing, why has the government overseen so many measures aimed precisely at undermining bargaining power, including big cuts in penalty rates for service workers, weaker minimum wages, and wage caps imposed on its own employees? It’s glaringly contradictory for the government to speak wistfully about workers’ bargaining power, while simultaneously suppressing their every effort to get it.

Prime Minister Malcolm Turnbull. (AAP Image/Mick Tsikas)

There’s a deeper contradiction, too, in Mr Cormann’s musings. The government cites Treasury modeling to support its claim that company tax cuts will indeed boost wages. But the “computable equilibrium” model used by Treasury (consisting of hundreds of mathematical equations) does not capture the effects of bargaining power – and to the contrary, denies it has any relevance whatsoever.

With my co-authors David Richardson and Bill Browne, I have catalogued the detailed logic behind the Treasury model in a recent Senate submission.

To link company tax cuts to higher wages, the model relies on a long and fragile chain of assumptions. The failure of any link in that chain brings the whole argument crashing down.

Treasury’s assumptions include:

  • Companies will automatically increase investment under lower tax rates, regardless of other macroeconomic conditions or concerns (like falling housing prices, global trade tensions, and other unknowns).
  • Savings will be marshalled to finance that extra investment, with no increases in capital costs. Given record-high debt loads, those savings certainly won’t come from Australian households. And if the capital flows in from overseas, that just confirms the main beneficiaries would be foreigners.
  • More investment translates into extra real capital (or tools) for each worker to use in production. That assumes capital is spent productively on real assets and technology – not takeovers or share buybacks. It also ignores the ongoing decline in capital intensity in Australia’s economy (due to the concentration of new jobs in labour-intensive services).
  • Higher capital intensity automatically boosts labour productivity. But this ignores other factors influencing productivity growth (which has been spotty in Australia recently).
  • Crucially, the model assumes the economy is operating at full employment, and continues to do so after the tax cut. There are no unemployed or underemployed workers to undercut wage pressures.
  • Finally, the model concludes that workers automatically receive wage increases in step with higher productivity. This is perhaps the most unbelievable assumption of all: in the real world, wage gains have lagged far behind productivity growth for a generation.
Minister for Finance Mathias Cormann, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison. (AAP Image/Mick Tsikas)

“Bargaining power” is not discussed in the Treasury model: it’s literally not a relevant concept. In the model’s imaginary world, the market gives everyone all the power they need to sell their services for a fair, competitive price.  Moreover, the moment we acknowledge that bargaining power matters, the model’s other assumptions (including full employment and the correlation between wages and productivity) are invalidated.

So by suggesting company tax cuts will lift wages by strengthening workers’ bargaining power, Mr. Cormann is not just being hypocritical (given his government’s repeated efforts to undermine workers’ power).  He is in fact rejecting the core intellectual basis of the very model his government has invoked to “prove” the benefits of the tax cuts.

Whether it’s awkwardly phrased in terms of “bargaining power,” or in the more classical terminology of free-market equilibrium, the claim that company tax cuts will help workers is ultimately just another expression of trickle-down economics: make the rich richer, and the rest of us will somehow benefit. The credibility of trickle-down has never been lower – and politicians from all sides know it.  That’s why the company tax cuts face such a rough ride in the Senate, and then on the campaign trail.