As the treasurer lauds supply-side economics, a once-controversial recovery theory is gaining traction.This is the essence of modern monetary theory – that government budgeting is nothing like household or business budgeting, for the simple reason that government can create money.
Morrison’s pursuit of Trump economics
Not many people nominate Donald Trump as a positive role model, but Scott Morrison and Mathias Cormann do. Trump, they would have us believe, has finally provided proof that trickle-down economics actually works.
Indeed, if you listen to the rhetoric of the Turnbull government’s two senior economic ministers, the benefits of the president’s radical reduction in the United States corporate tax rate, from 35 to 21 per cent, are not so much trickling down to America’s workers as gushing.
In their efforts to persuade a sceptical public of the benefits of big corporate tax cuts in this country, they have lately become ardent in their endorsements of the Trump experiment. This is a new development.
Last year, their main argument was that we needed to reduce company tax as a defensive measure, because other countries had lowered their business tax rates over the past decade, and particularly because the US government was planning its big cut. Companies would be less willing to invest here, they claimed, if our corporate rate was not competitive.
That argument didn’t cut it with electors, who remained overwhelmingly opposed to the planned reduction in tax for big businesses from the current 30 per cent down to 25. And for good reason: there is negligible real-world evidence to support it.
In the past month or so, the ministerial pair’s emphasis has changed. The claim now is that without tax cuts Australian workers won’t get pay rises.
Alas, for Morrison and Cormann, the new line does not seem to be resonating with the electorate either. When asked in this week’s Essential poll whether the government’s proposed tax cuts would “attract investment and create more jobs and higher wages” or simply increase profits for business without improving wages, twice as many Labor voters believed the second proposition. Among Greens, close to three times as many respondents favoured the latter. Among minor party voters, almost twice as many believed profits would grow but wages would not.
Still, they run the line incessantly, and have refined it to a simple message, as articulated by Cormann on ABC Radio earlier this week: “The only thing standing in the way of a wage rise for Australian workers is the Labor Party.”
This is not true, of course. It’s not only the Labor Party opposing the proposed tax cuts; it’s also the Greens, Nick Xenophon’s senators and One Nation. Pauline Hanson might not know a lot about economics, but she can read public opinion polls.
So Cormann and Morrison face a tough, even desperate, selling job, and there is probably no clearer indication of that than the fact they are tying their credibility as economic managers to that of Trump.
Cormann, in that ABC interview, invited listeners to look abroad for proof that trickle-down economics works.
“Look no further than the United States,” he said. “The effect after the Trump administration was able to pass their tax cuts through the US Congress was as immediate as it was dramatic.
“Immediately, a long list of businesses in America provided wage increases and additional bonuses to their workers.”
In another interview, Morrison invited people to look at the “lived experience over a very long period of time, as recently as what we’ve seen in the United States” for proof of the benefits to workers of corporate tax cuts.
Certainly, since the Trump tax cuts came into effect on January 1, a tiny fraction of US corporates have given a little more to their workers. But the extent to which those rises were a direct consequence of the cuts, and whether people will be better off as a result, are moot points.
A White House statement of last week claimed: “Since President Trump provided his historic tax cuts and reforms, more than 3.5 million American workers across more than 300 companies have received bonuses, raises, and increased [sic].”
There are a couple of points to be made. First, there are about 30 million businesses in the US: the White House was talking about 0.001 per cent of companies. Some of the corporates mentioned were very large, but even then, the White House crowed about 2 per cent of the workforce.
Second, there is good reason to believe many of those companies that increased their workers’ pay did so for reasons other than the corporate tax cut. America’s biggest private employer, Walmart, for example, increased the minimum pay for its employees to a princely $US11 an hour in January. But as a number of US labour market analysts have pointed out, it was playing catch-up. Several of its major competitors pushed their minimum pay rates up before the Trump tax cuts came into effect. Target went to $US11 in October last year; Costco went to $US13 last March.
The same analysis applies to many other employers in other sectors, too. The fact is, the American economy was growing jobs at a rapid clip long before the corporate tax cuts – in fact, long before Trump won office – and the US unemployment rate now stands at just over 4 per cent. Although employers such as Walmart – a notoriously Republican-aligned company – credited the tax cuts, a more plausible explanation is competition for labour.
Third, the gains for workers are mostly tiny and temporary, relative to the benefit their employers will enjoy as a result of the tax cuts. Much of the money handed back to workers has been in the form of one-off bonuses of just a few per cent of salary, rather than permanent wage rises.
Furthermore, many employers have tied the size of those bonuses to the length of time workers have been employed. The White House trumpeted the fact that Lowe’s, another of the big retailers, was giving a bonus of “up to $1000” as a consequence of the tax cuts. When The New York Times analysed the fine print, though, they found that to get that $US1000 maximum bonus an employee had to have worked for the company for 20 years or more.
The New York Times cited figures from the US Bureau of Labor Statistics showing the median tenure for retail workers was three years. A typical Lowe’s employee would get $US200.
We could go on recounting examples of the paltry quantum of pay rises – there are many analyses out there, relating to various sectors of the US workforce. In sum, though, they bear out the assessment of the House minority leader, Nancy Pelosi, who called the pay rises and bonuses offered to workers “crumbs” in comparison with the $US5.5 trillion, 10-year bonus Trump gave corporate America.
Still, even a $US200 bonus for a low-wage worker is better than nothing, right? Except that a worker trying to support a family on $US11 an hour falls below the US poverty line, and therefore is dependent on what little welfare support America offers. And Trump’s proposed budget looks for the savings to partly pay for those lower corporate tax rates by going to the already inadequate social safety net, to programs such as Medicare and the Supplemental Nutrition Assistance Program, which last year provided America’s 44 million working and non-working poor with an average $US125 per person, per month, so they might afford basics such as food.
Trump plans to cut about $US1.8 trillion from those social programs. It is scarcely an exaggeration to say his budget would starve Peter to pay Paul.
Even so, Trump’s economic plan will add almost a trillion dollars to the US federal deficit over the next year, and $US7 trillion over the decade. Here is Morrison and Cormann’s economic hero.
Neither the treasurer nor his finance minister mention these details, of course. They prefer to focus on other forecast consequences of the Trump tax cuts. They seized, for example, on the recent forecasts by the International Monetary Fund, which upped its projection for global growth in the coming year from 2.3 to 2.7 per cent, largely as a consequence of a kick-up in US growth.
In celebrating this, though, Morrison and Cormann ignored the big caveats attached by the IMF economic boffins.
Essentially, the IMF suggested the tax cuts would provide a near-term sugar hit to the US economy, and that this would have “spillover” benefits for its trading partners. Then, a few years from now, about 2022, would come a sugar crash, as the US government was forced to deal with the Trump deficit.
It seems strange, considering that Australia’s conservative government came to power partly on a scare campaign about a “debt and deficit disaster” under Labor, that they chose not to mention this part of the IMF report.
There is much else about the Trump tax cuts that the government also chooses not to mention, such as how America’s big corporations are actually spending the great bulk of their windfall gains.
Last week, Democratic members of the Senate finance committee released a report showing that in just over a month since the corporate changes came into effect, US corporations had announced share buybacks worth $US97.2 billion, compared with just $US2.5 billion in announced bonuses for employees.
That is to say, 40 times as much money had been earmarked to go into the pockets of shareholders and corporate executives who own stock as had been reserved for the pockets of workers.
Other data suggest this pattern is likely to continue, and that White House claims saying most of the benefit of the tax cuts would flow to workers were wildly off the mark. One survey of corporate intentions, done by the human resources consultants Aon Hewitt before the introduction of the cuts, found 83 per cent of companies did not expect to pass on any pay increases.
Another big survey by Morgan Stanley, which got wide coverage in the US last week, found about 43 per cent of the value of the corporate savings due to the tax cuts would go to share buybacks and dividends, 19 per cent to mergers and acquisitions, 17 per cent on capital spending and 8 per cent to paying down debt. Only 13 per cent would be passed to employees.
The inescapable logic of these numbers is that even those workers who end up modestly better off in strict dollar terms will be worse off in relative term as the great bulk of the benefit flows to the upper end of the income scale. The US, already the most economically unequal of developed nations, will be significantly less equal.
And there is cause to doubt that those workers will be better off even in dollar terms after increases in asset prices and interest rates – the almost inevitable consequence of Trump’s debt-fuelled spending binge – eat into their small pay rises.
There is growing concern among the ranks of the wealthy, whom the tax cuts will benefit, that the Trump plan will overheat an already hot economy. Hence the wild gyrations on Wall Street over recent weeks. The boss of Goldman Sachs, Lloyd Blankfein, added his voice to the chorus of concern on Thursday, warning of a reckoning down the track.
But Cormann and Morrison continue to argue we should look to America as an inspiration, as do a cheer squad of big business leaders in this country.
Earlier this week, the ABC’s chief economics correspondent, Emma Alberici, produced a detailed analysis of the tax affairs of Australia’s largest companies, questioning the need for a tax cut. Most pay nowhere near the nominal rate of 30 per cent. The average rate paid was just 17 per cent, and one in five big corporates had paid nothing for the past three years at least.
Alberici’s analysis got swallowed up in a debate about whether the various companies named had reduced their tax obligations by justifiable means. Qantas chief executive Alan Joyce, for example, went on ABC Radio to defend his company’s non-payment of corporate tax for nine years, arguing it was legitimate under rules that allowed it to carry forward losses from previous years.
But while the recitation of corporate excuses for non-payment was interesting, and in some cases infuriating, the more important part of Alberici’s work got less traction. She included a comparison of the economic performance of various countries under varying corporate tax regimes.
Did a lower company rate encourage investment? Alberici, citing the independent economist Saul Eslake, noted that Canada, which has a similar, heavily resource dependent economic profile to Australia, cut its corporate tax rate from 42.4 per cent in 2000 to about 26 per cent in 2011. Australia’s rate went from 34 to 30 per cent.
Yet business investment was much higher in Australia. Likewise, Canada’s big reduction in company taxes did not lead to high wage growth. Wages for Australians have risen about 20 per cent more than for Canadians since 2000.
Even more dramatic was the story in Britain, where corporate taxes were reduced from 30 to 19 per cent between 2006 and 2013. Wages there actually fell. Over the same period, the US maintained its much higher tax rate and wages grew modestly.
Alberici cited work done by the US Congressional Budget Office, comparing international company tax regimes, which showed that Australia’s “effective” tax rate – that is the rate that companies pay after allowing for deductions – was just 10.4 per cent, among the lowest in
In line with a growing body of evidence-based opinion, she concluded that “businesses make decisions about where in the world to park their money based on myriad reasons, possibly least of which is the headline corporate tax rate”.
Wayne Swan, the former Labor treasurer who saw Australia through the global financial crisis and is a vocal critic of corporate tax rorting, dismisses the argument that a lower rate of company tax will result in less tax avoidance.
“The notion that they will somehow stop rorting the system if the rate is reduced is horseshit. They don’t want to pay tax at any level,” he says.
He dismisses the simplistic argument set out by Cormann and Morrison, that tax cuts will make companies more profitable, allowing them to pay workers more.
“The rules of the labour market have changed,” Swan says. “It’s obvious. Right now we have a record profit share in Australia and a record low wage share.
“The new dynamic is that for a given, apparently low rate of unemployment, there is more slack in the labour market. There is a record level of underemployment beneath that headline figure. That’s never been present before.
“Some of this has to do with technology and other things, but a lot of it is to do with greed, frankly.”
In his view the “radical right” of business and politics has adopted “a much more aggressive, survival-of-the-fittest stance in their dealings with government and workers”.
He says: “And central planks of this are the destruction of the progressive tax system in both personal income tax and company tax and the denial of the right of workers to bargain fairly for their wages.”
Dr Jim Stanford, director of the Centre for Future Work, agrees and elaborates.
“It’s fanciful to think companies will pay higher wages just because they have more money. There’s no logical connection there. In essence, employers pay what they have to pay to recruit, retain and motivate the labour power they need to run their businesses. If they don’t need to pay more, they won’t pay more.
“Wages in America are rising, slowly, at the moment. That has nothing to do with the tax cut, though, but with an unemployment rate that’s almost down to 4 per cent.
“US employers there are finding they have to pay a bit more to attract and retain talent, but in Australia we are a long way from that point. Not only is the official unemployment rate higher, but, more importantly, the official rate hides the underutilised pools of labour that employers can tap.”
The causes of stagnant wages in this country have nothing to do with corporate tax rates, Stanford says, and everything to do with changes in the patterns of work.
Stanford rattles off a long list of structural and regulatory factors that are suppressing wages, among them the erosion of the awards system and the “collapse” of enterprise bargaining that has seen the number of enterprise bargaining agreements plunge almost 40 per cent just since 2013.
“The worksite itself tends to be smaller and more fragmented and harder to organise for collective power, and the form of jobs is more commonly casual or irregular or nominally independent,” he says.
“What can an Uber driver working long hours and not making even minimum wage do about it? They don’t even have a boss to ask for a raise. They can’t ask their app for a raise. Who do they deal with – when they are considered their own boss, as opposed to an employee? It’s actually considered anti-competitive behaviour if so-called contractors try to band together.
“By my estimate, only 48 per cent of the labour force in Australia today is employed in a traditional, permanent, full-time paid job, with what used to be considered standard entitlements, like holidays, sick leave and so on.
“So more than half of the labour force confronts one or more dimensions of insecure work.”
None of that will be fixed by lowering company tax rates, says Stanford.
But Morrison and Cormann will continue to tell us otherwise. Trust us, they say. Trust Donald Trump.
This article was first published in the print edition of The Saturday Paper on Feb 17, 2018 as "The maligned leading the blind".
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