By Garry Shilson-Josling.

When Australian Treasurer Scott Morrison hands down the 2018–19 budget on May 8, it’s a safe bet that he will stress two things: cutting the deficit and cutting the company tax rate.  

But he may have trouble getting the message across. Big trouble, according to an Ipsos poll conducted on behalf of Chartered Accountants Australia and New Zealand. The survey conducted in April this year polled more than 1000 Australians.  

When asked to choose three top priorities from a list of 12 options, 49.9% chose health, 42.7% picked employment, and 39.5% chose housing affordability, including reforms to capital gains tax and negative gearing. Education (29.5%) and economic growth (27.0%) were next. Further down the list were the issues: “Getting the budget back to surplus” and “Tax reform”.

That is a real problem for Morrison, and for Prime Minister Malcolm Turnbull, who has now 31 consecutive negative Newspoll results under his belt, one more than his predecessor Tony Abbott. Morrison and Turnbull will find themselves arguing for policies that the poll shows attract half-hearted support at best, so they will need to muster all their powers of political persuasion.

Company tax

Not even one in 20 – the figure was just 4.6% – of survey respondents chose tax reform as their top priority. That’s little more than half what could be expected if respondents had used a dart board and a blindfold. Only 17.1% included it in their top three priorities, putting it in eighth place.  

Support for tax cuts for the big end of town is especially lacking. While 60.2% think individuals deserve tax relief and 44.5% want small business to pay less tax, only 15.7% say they think company tax should be cut. 

Get equipped to develop cutting edge tax planning strategies and add more value to your clients with exclusive insights from ATO executives and practice leaders. Join us in Sydney or watch on the go. 

Against this background, crossbench Senators have dug in their heels, forcing the government to put a key bill on ice. The legislation would phase in cuts in the company tax rate for all firms to 25% by 2026–27. At present, businesses with annual turnover under $50 million are stuck on 27.5%, with bigger firms still on the 30% tax rate.

Respected economist and Acuity contributor Saul Eslake says conventional economic theory shows tax cuts should stimulate investment, labour productivity and wages, encourage more people into the labour market and lift employment. But he is unimpressed. “I can accept the theory, but even the government’s own modelling says the effect is really small,” he says.

Treasury research shows an employment rise of less than a half per cent and real wage rises of about 1% at most, would take several decades to flow through.  

Eslake’s concern is that the real world may not follow the script set out in the models. He singles out two key problems. For one thing, dividend imputation “punches a big hole in the theory”, he says.

For many Australian taxpayers, company tax cuts would be offset by lower imputation credits, reducing confidence in a change in the behaviour of firms motivated to deliver returns to shareholders. The other problem concerns evidence. “I’ve struggled to find real-world evidence that cuts in the company tax rate actually have had the effects that the theory says they should in a significant way,” he says.

Sceptical voters

The CA ANZ Ipsos poll reveals such scepticism is widespread. An immediate 20% deduction for business investment in new assets rather than a company tax cut was preferred by 4.8% of respondents. That’s a vote of no confidence in the modelling that insists lower tax will automatically lift investment.  

CA ANZ Tax leader Michael Croker’s views on tax reforms are in line with the findings of the survey. “Orthodox economic thinking and appeals to keep Australia globally competitive in light of recent events in the USA and elsewhere have been countered by a chorus of disbelieving voices,” he writes on LinkedIn. 

Read CA ANZ Tax leader Michael Croker's view on how big business could articulate a social purpose in the company tax cut debate.   

Also in a recent Acuity article, he argues that to ensure positive outcomes, tax cuts could be bundled with commitments including repatriation of offshored jobs, re-skilling of displaced workers, and restraint on executive bonuses.

This is consistent also with the sentiment revealed by an Essential poll in February that found 72% of respondents thought businesses should be forced to pass on some of the cuts in the form of wage rises. So, while Treasury’s theorising assumes the market will deliver the benefits to ordinary workers, there’s a widespread perception that government intervention will be needed to make sure it actually happens. In other words, the public just isn’t buying it. Selling the plan will be made harder by pressure on the government to cut personal income tax rates.

Eslake’s calculations show that the percentage of personal income paid in tax has already risen by 1.5 percentage points since 2013 as wages drift into higher tax brackets. The projected return to surplus in 2020–21 relies heavily on even more bracket creep.  

Eslake says there’s an economic case for cutting personal tax rates, rather than pressing ahead with an unpopular company tax cut. It would at least give a boost to a weak spot in the economy – consumer spending.

Debt and deficit

Despite a decade of dire warnings about debt and deficit, only 9.5% of those polled put restoring the budget to surplus as their top priority. After 12 years of deficits, net government debt will have risen to $375 billion, (a $414 billion turnaround from a net creditor position in 2008), before the budget eventually returns to surplus in 2021, according to the latest mid-year review.

This assumes the budget stays on its forecast track, but Eslake thinks the government is in luck for once, thanks in large part to unexpectedly strong commodity prices.

“I think the budget may now actually be in better shape than the government thought it was going to be, and that’s the first time that would have happened since before the financial crisis,” says Eslake. Monthly government financial transaction reports suggest the 2017–18 deficit may even beat the latest forecast of $23.6 billion by as much as $9 billion.

Eslake warns that the government should take the opportunity to build resilience in its finances so it can be prepared for a future downturn in the economy. Even so, the lacklustre support for budget repair revealed by the Ipsos poll suggests the government will have little to gain by flagging a more aggressive deficit-reduction campaign.

Deductions, super and the black economy

Finally, the survey reveals only lukewarm voter support for the idea of capping deductions for expenses, with 47.3% supporting the status quo, and 26.7% supporting a cap on individuals’ deductions for work-related and other expenses.  

The survey also reveals scepticism about the generosity of employers if they are relieved of the cost of paying compulsory superannuation contributions. Only 21.5% expect any lift in wages, 29.1% think there will be no wage rises at all, and 24.4% don’t know. (The other 25.1% surveyed do not get compulsory super.)  

While the survey reveals a desire by many to reduce their tax burden, it also shows concern that others need to pay their fair share. Nearly half – 48.9% – want better regulation of the cash economy, with more than one-quarter (25.9%) agreeing that cash payments over a certain threshold should be illegal.

The tax base should be reformed and any tax cuts need to be justified, writes CA ANZ Tax Leader Michael Croker in a pre-budget tax submission.

Garry Shilson-Josling has been chief economist at both Australian Associated Press and MMS Standard and Poor’s Australia/NZ, and an economist at the Commonwealth Bank of Australia.

Photograph: Andrew Meares / Fairfax