Whenever you hear someone offering you something for nothing, it’s always wise for a buyer to beware. So too should governments be when they are being told a tax cut will increase revenue.

It is well known, among everyone who realises there are two sides to a budget (which alas has not always included the treasurer) that Australia has a revenue problem. Tax revenue is down on recent historic levels, and at a time when the push has been to increase expenditure.

That is why calls to cut certain taxes need to be considered carefully, and why we should be very sceptical when the recommendation for a cut in a tax is made on the promise of higher tax revenue in the future.

This week PwC released a report suggesting that cutting the company tax rate would not actually cost the budget, but within five years would actually have the budget $4bn better off, and $10bn better off by 2025.

Yeah, sounds magical.

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Cutting taxes to increase revenue was all the rage back in the 1970s and 1980s. Ronald Reagan got hold of the idea from some of his advisors that because of the Laffer Curve, cutting income tax rates would see not only more people working and GDP growing, but growing by so much that tax revenue would actually grow.

Alas it didn’t, and those who argue it did ignore that Reagan, while he slashed the income tax rate, also greatly broadened other taxes, which helped plug the revenue hole he had created.

Now, the proposition that cutting the income tax rate (or company tax rate) might increase GDP growth is not very controversial. You can argue over how much of an impact it will have – and again, looking at the impact of Reagan’s tax cuts on GDP growth we need to also consider that interest rates at the time were slashed and the US also ran huge stimulatory budget deficits.

But arguing that cutting company tax will be so beneficial to the economy that revenue will actually increase is a very dangerous path to take.

When I was in the public service I would often hear such talk from industry lobbyists wanting increased subsidies or tax incentives. The phrase “it will pay for itself” was often used. It was not a phrase I must say that was given much credence when talking with anyone from the Treasury department.

Generally, a smirk and a raised eyebrow was the response you would get.

The rationale behind a company tax rate cut fuelling higher revenue is based on it driving a big increase in investment. But, as Craig Emerson noted in the AFR, what if the barrier to more foreign investment coming into this country is not the current company tax rate?

Certainly Paul Krugman, in his visit to Australia recently, scoffed at the idea that our company tax rate was hurting us. He noted that Australia “is the world’s champion of capital inflow! Nobody has had a consistent history of money flowing into the country the way Australia has.”

If the company tax rate cut occurred and investment did not grow as hoped, our budget deficit would increase and as a result our credit rating could be downgraded. This inevitably would lead to an increase in our bond rates, which would in turn raise the cost of raising capital for Australian companies.

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But betting on higher GDP growth is a nice way of doing things. Prime Minister Turnbull recently told his partyroom that they would cut the deficit by having the economy grow faster than government spending.

In theory, it works well. If, as a percentage of the economy, spending grows by 2% while GDP itself grows by 3%, the government’s spending as a percentage of GDP will fall.

It means you can promise a smaller deficit while not having to worry about specific cuts or increased taxes.

But what if the growth is not what you hoped it would be?

On Tuesday, at the Australian Business Economists Conference, the deputy secretary of the Treasury, Nigel Ray, announced that Treasury had lowered its forecast for Australia’s potential GDP growth from 3% to 2.75%, due to lower than expected population growth.

He noted that “as economic growth has softened, recent immigration outcomes have come in lower than the Department of Immigration and Border Protection initially expected. This mainly reflected declines in temporary visa holders and lower net migration from New Zealand”.

Certainly the numbers of New Zealander migrants has dropped noticeably:

And in more bad news for those hoping for strong growth over the next few decades to make everything rosy, Ray also noted that “the ageing of the population means that the economy’s potential growth rate is projected to fall slowly over time, reaching 2.5% by 2050”.

The problem with predictions was also raised by the governor of the RBA, Glenn Stevens, at the same conference.

He noted that the RBA has begun using “fan charts” which highlight that the bank’s forecast for GDP growth is just the mid-point within 70% and 90% confidence intervals. He also suggested that “there is little numerical precision that can be attached to these rather qualitative views”.

That doesn’t mean he thinks the forecasts are pointless – rather that people should stop believing they are meant to come in perfectly on target. Rather they should be a guide for policy.

Now that perhaps could be used as a guide for cutting the company tax rate. But if you are implementing that policy based on the belief that, once the numbers have been punched into a model, revenue will increase by $5bn in net terms, you are being rather foolish.

Tweak a few numbers on that model – expected GDP growth, labour growth, wage growth or population growth – and the nice surplus number can quickly disappear.

Yes, there may be benefits from lowering company tax. The Henry tax review noted that cutting company taxes “would also encourage innovation and entrepreneurial activity” and that it would “boost national income by building a larger and more productive capital stock”. It also argued such a move could “improve the productivity of Australian businesses and employees” due to “improved technology spillovers from that investment”.

All good things.

So sure, argue for a company tax rate because it will improve GDP growth, or perhaps because our rate is uncompetitive with other nations, but please, spare us the line that cutting the company tax rate will increase revenue.

Your model might say it does, but a government would be very foolish to bet on the numbers.