One article of faith in the corporate sector is that low taxes are good for the economy – not only low corporate taxes but also low taxes in general.
Echoing this sentiment, Treasurer Hockey and other spokespeople for the Government repeatedly promise to cut taxes. Even suggestions that the GST should be increased are set in the context of a tradeoff against income taxes, rather than any net increase in tax.
For a start, let’s get one myth out of the way. Although repeated surveys reveal that most people believe Australia is a high-tax country, the reality is that among high-income OECD countries, Australia’s taxes (as a percentage of GDP) are very low: only the USA has lower taxes, and they have achieved this by running much higher budget deficits than in Australia.
Another myth is that high taxes are bad for the economy. Again, looking at high-income OECD countries, there is no evidence to support this proposition. There is no relationship between the level of taxes and economic growth or competitiveness. What does seem to be the important factor is not the size of government (as measured by taxes or spending), but the purposes to which public revenue those taxes are put. A competent “big government” contributes to economic performance in ways that an incompetent or corrupt “small government” does not.
Also, research on competitiveness suggests that some countries try to entice investment with the offer of low taxes to compensate for deficiencies in other conditions, such as poor infrastructure, corruption, or an inadequately educated workforce.
Businesses need publicly-funded services. They obviously need the networks of transport and telecommunications infrastructure. They need an educated and healthy workforce. They need a publicly-funded but independent legal system.
Less obvious, but no less valid, is the way business benefits from safety nets, such as social security payments. If people are to take risks, such as investing in start-ups, or developing specialist skills, they need a safety net to fall back on when these investments fail.
The economist Joseph Stiglitz points out that well-crafted taxes can actually improve a country’s economic performance. Tax regimes which give a leg-up to new ventures, which encourage re-training, or which shape depreciation provisions to encourage the uptake of new technologies, can all help improve a country’s economic adaptability. A carbon tax is an example not only of a payment for harm done to others (“negative externalities” in the language of economists), but also of an incentive for industries to adjust and modernise their production methods.
Of course, established businesses have a voice in various industry associations, such as the Business Council of Australia and the Australian Chamber of Commerce and Industry, as well as numerous industry-specific lobbies. These organizations, quite understandably, represent the interests of established firms (just as trade unions tend to represent the interests of already-employed workers). These are the firms that have established their place in the market, have benefited from past investments in public goods, and which don’t necessarily welcome the entry of new firms into their industries. They certainly don’t welcome disruptions such as carbon pricing – disruptions which may force them to lift their game or to go out of business as new and more nimble competitors grab opportunities.
Also when these lobby groups speak on tax matters, particularly personal income taxes, it is questionable whether they have in mind the interests of corporations (inanimate constructs with no interests other than those of their stakeholders) or the interests of generously-paid corporate managers.
In recent times we have heard pathetic rationalisations as to why Australian companies should be able to use Luxembourg as a tax haven, and why any right-minded business executive should feel affronted by the suggestion his or firm should pay their share of taxes. Perhaps the “small government” line is just a conditioned, rather than a considered, response.
In the next article we’ll look at the ethics of tax avoidance – it’s not as straightforward as it looks at first sight.