The Big Con (Budget Special)

THE BIG CON

In case you missed it, the centrepiece of the recent election campaign launch Federal Budget was a tax cut package for multinational corporations. Verdict? A stinky budget.

Even he knows it stinks

Now there's a bit more to it than that, and I apologise profusely in advance for what I'm about to do, but nobody has really explained why it is a stinky budget.

So, the tax cut itself. Firstly, businesses receive a tax cut in order of turnover - first $10 million, then $25 million and eventually up to $1 billion. Then, all businesses receive a tax cut as the corporate rate of tax is progressively reduced down to 25%.

This post is going to have more numbers and be denser than a First Dog on the Moon comic.
Sorry not sorry.

The big con is that this is being advertised as a tax cut for small business. Because of something called DIVIDEND IMPUTATION, small business proprietors will end up paying the same rate of tax on their profits.

Imputation, huh?

Before 1987, businesses paid tax on profits and any dividends distributed to shareholders were also taxed at that level as marginal income. In this system, if a rich salary earner such as Malcolm Turnbull also ran a business and made $100 profit, here's how he would be taxed on those profits:

Company
Profits	100
Company Tax	30
Net Profit After Tax	70

A $70 dividend is distributed, on which poor Malcolm would pay thusly:

Shareholder
Dividend	70
Tax payable (45%)	31

Total tax take on that $100 company profit ($30 from company + $31 from shareholder) = $61.

Even a Tax Emperor like myself thinks a 61% tax rate is a bit steep, especially considering that the corporate rate doesn't discriminate between small and large turnover businesses. So Hawkie changed things up.

HAWKIE!

Here's how the previous example would play out under the current system of dividend imputation:

Company
Profits	100
Company Tax	30
Net Profit After Tax	70

Shareholder
Franked dividend	70
Imputation credit	30
Taxable income	100
Tax payable (45%)	45
Credit for tax already paid by company	30
Tax payable	15

Total tax collection ($30 from company + $15 from shareholder) = $45, which just so happens to match the shareholder's marginal rate of tax.

Now let's plug in the proposed budget changes and see how it would play out with the proposed 25% company tax rate:

Company
Profits	100
Company Tax	25
Net Profit After Tax	75

Shareholder
Franked dividend	75
Imputation credit	25
Taxable income	100
Tax payable (45%)	45
Credit for tax already paid by company	25
Tax payable	20

Total tax collection ($25 company + $20 shareholder) = $45

WHOA IT'S THE SAME

Surprised?

Tax Caveat Mumbo Jumbo
The cut in the tax rate does make it more tax-effective for businesses to reinvest their profits in the business (instead of distributing them to owners), but people need to eat and they will access their profits sometime. I also haven't modelled things like trading trust distributions (an opportunity to split income), loans to shareholders and returns of capital because I NEED TO LIVE.

The point is that, as the latter two examples show, any reduction in taxes paid by business will be made up by the corresponding increase in tax paid at the shareholder level.

Unless
Unless you're a foreign shareholder. Foreign residents don't get access to franking credits, and withholding tax at the corporate rate may be taken from their dividends, but they don't pay the top up tax of 15 or 20% shown in the imputation examples.

What Scott Morrison wants is for large foreign owned businesses and multinationals including NewsCorp, Apple, Chevron and Microsoft to pay less tax (if that's even possible?). Australians, on the other hand, will pay the same amount of tax, and SloMo is banking on you not realising it.

Does it matter?
"Budget tax cut is for foreigners, not you" is a pretty short post, so I thought I would write more about whether the claimed benefits of a lower corporate tax rate are likely to eventuate. Here's a hint: they aren't.

The sole argument that has or indeed can be raised for reducing the corporate tax rate is that it will "encourage foreign investment", yes, this from a government which has restricted foreign ownership of housing and agricultural land.

But there's no actual evidence that reducing the corporate tax rate to 25% would increase foreign investment. Foreign investment is driven by other factors such as demand within and without of the target economy, demography and commodity prices. There is no correlation between the corporate tax rate and foreign investment levels. And further, so many large corporates don't even pay 30% tax at the moment that the same budget mandated for a creatively named ATO taskforce to go after these people.

TAX FORCE ASSEMBLE

30%, 25%, whatever per cent of zero you choose is still zero, so how will lowering the tax rate improve collection?

On the flip side, think about what multinational corporations are paying for with the corporate taxes they do pay. A large, highly wealthy (by global standards) consumer base to sell to which enjoys some of the highest living standards in the world. The infrastructure which makes their products available across a geographically sparse continent. A highly educated workforce which can be tasked to drive innovation and improvements in productivity.

Instead, the 2016 budget prioritises the interests of Delaware, Redmond, Cupertino and Singapore over doing what's best for Australia. There is zero evidence that this is anything less than a con job. It is in every sense a budget worthy of Joe Hockey.
Reject it.