John Fraser says cuts should be pursued as Australia relies on foreign capital and needs a competitive tax rate

This article is more than 2 years old

This article is more than 2 years old

The Treasury secretary John Fraser says the Turnbull government’s $65bn company tax cuts will boost wages by just $750 over time, but the cuts should still be pursued because Australia will have one of the world’s highest tax rates if they aren’t.

Speaking at Senate estimates on Wednesday, Fraser told senators that Australia relied heavily on foreign capital flows so it needed to have a competitive company tax rate.

He said Australia’s 30% headline company tax rate was one of the highest in the world, and after the United States slashed its corporate rate this year, and with Belgium, France, and the UK planning to cut their tax rates, it presented a “challenge” for Australia.

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“The scale of the changes and the pre-eminence of the US in the global economy mean that this is a big event. It will attract capital to the US, raise investment and boost their economy,” Fraser said.

“For Australia, one thing is clear after these changes. We will have one of the highest corporate tax rates amongst advanced economies. In a competitive world for corporate capital flows this represents a challenge.”

His comments were welcomed by the Coalition, which has been arguing forcefully for the need to keep Australia’s corporate tax rates “competitive”.

But when asked to describe how the government’s proposed tax cuts would boost Australian wages, Fraser said any wage increases would be minor.

“In the modelling we did on the tax cuts, I think we saw a $750 increase in wages, coming from the corporate tax cuts,” he said.

The Greens senator Peter Whish-Wilson then asked him to clarify if that meant the average Australian worker would be getting an extra $750 a year from the tax cuts.

Fraser said the $750 figure did not refer to an annual increase in wages per worker – it referred to the estimated “level lift” in wages that would occur across the economy once the tax cuts had been fully phased in, and after companies had responded to those tax cuts by increasing investment in Australia, and after that investment had led to productivity growth.

He did not say how long it would take for that process to run its course.

Michael Kouparitsas, a principal adviser from Treasury’s macro-modelling policy division, provided more detail.

“We released a paper at the time of the 2016-17 budget [that] detailed all of the wage increases, including after-tax increases,” Kouparitsas told senators.

“The primary mechanism [by which wages will lift] is by deepening capital stock ... the orthodox view is we’ll raise productivity and that will drive a real wage increase.”

Peter Whish-Wilson asked: “So what kind of wage increases are you forecasting from the tax cuts?”

Kouparitsas replied: “It’s in the range of over 1%.”

Peter Whish-Wilson asked for clarification: “Per annum?”

Kouparitsas replied: “No, it’s a level increase. We’re talking level increases from policies like this.”

Whish-Wilson: “So not much really, because you’re only talking about 1% over time?”

Kouparitsas: “Yeah, so the [$750 increase] is reflective of once the capital stock has fully deepened.”

The statements from Fraser and Kouparitsas clarified past statements from Malcolm Turnbull who has promoted his tax cut package by saying the average worker would have an extra $750 in their pocket “each and every year” if the corporate tax rate was cut from 30% to 25%.

In February last year, in a speech to the National Press Club, Turnbull said:



“If we had a 25% business tax rate today, full-time workers on average weekly earnings would have an extra $750 in their pockets each and every year.”

Treasury’s analysis of the tax plan relied on a static general equilibrium model, meaning Treasury compared how the economy would change from its current “steady state” to a new “long-run equilibrium” after taxes were cut.

It provided no indication of the time it would take to achieve the new long-run equilibrium, meaning the government does not know how long it will take for the level of average wages to increase by $750.

The model also does not say workers’ wages will be $750 higher “each and every year” after the process has run its course. It says the level of average wages will increase by $750 in the long run (equivalent to a $14.40 a week pay rise).