Do Donald Trump's recent company tax cuts provide inspiration and validation for Australia's seemingly-similar tax cuts, as Malcolm Turnbull suggests?

Mr Trump's well-established economic ignorance might give us pause, but his cuts do seem to have boosted US equity markets and stimulated growth. This evidence, however, offers no support for trimming company tax here.

While it's too early for a definitive reading, the US tax cuts don't seem to have done much to promoted investment or wages.

Bank profits have benefited hugely, but there are no extra jobs or investment in Wall Street — only a restoration of fat bonuses and share buy-backs.

Apple's $US100 billion share buyback is the largest ever, but many other companies are using the windfall the same way, or to fund mergers rather than new investment.

Trump tax cuts favour the wealthy

This much is indisputable: the Trump tax cuts directly favour the wealthy: well over 80 per cent of shares are held by the richest 10 per cent.

Growth prospects are up, but for reasons not relevant to Australia. The Trump tax cuts are fiscal stimulus, not offset by increased budget revenue or cuts in spending (in fact expenditures actually increase).

The US budget deficit will increase over the next few years from 3 per cent of GDP to more than 5 per cent. Of course this will stimulate short-term growth, but at the cost of mounting government debt and a need to wind back the deficit later.

This is a politically driven sugar-high for the economy.

In contrast, the Australian proposal is budget-neutral, although the revenue and expenditure changes needed to offset the substantial revenue loss have not been detailed, or even much discussed.

The Trump tax cuts are a fiscal stimulus, while the Australian cuts are a switch of revenue sources.

Australia's tax imputation delivers different result

Whatever measures are taken to offset the local tax cut, these will inevitably dampen growth.

This is, in fact, the main message of the Treasury modelling: after several decades, the impact is equivalent of a rounding error in an economy that will have grown about 50 per cent in that time. Thanks to the cuts, national income will eventually be just 0.6 per cent higher. Jobs will be up by an imperceptible 0.1 per cent.

The differences with the Trump cuts are, in any case, more fundamental. Mr Trump has increased the after-tax return to American shareholders, who then spend this extra income to boost the economy.

Australia's long-standing tax imputation delivers a quite different result. Company tax is refunded to shareholders when profits are distributed as dividends. Even when profits are retained rather than distributed, the share price reflects the benefit of imputation.

For Australian shareholders, company tax is effectively a withholding tax, fully returned to them later. When the company pays less tax, the Australian shareholders get less imputation credit. Company management acting in the interest of just the Australian shareholders would have no reason to increase investment.

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Logic of Treasury modelling is flawed

Thus the direct benefit of any Australian company tax cut is confined to foreign investors. And not just the new investors: the lost budget revenue is so substantial because the huge stock of existing foreign investment will also receive this windfall.

No-one knows how much effect this might have in its primary objective of encouraging more foreigners to invest here. But the logic of Treasury's modelling is flawed. It sees the world as a perfect market, where footloose foreign investment responds strongly to small differences in company tax.

Why would foreign investors find profitable additional investment opportunities here, when the local investors have such a big advantage over them because of the effective zero-tax rate which imputation provides?

Why wouldn't all the profitable investment opportunities already have been taken up by Australians, borrowing overseas at the global interest rate to fill the gap in our national saving?

The answer is that foreigners invest here because other factors are far more important than modest differences in tax rates.

In the real world, foreigners are attracted here by the specific attributes of Australia: the opportunity to invest in our mineral and petroleum resources; or our oligopolistic banking system: or our duopoly retailers and airlines. As well, foreigners want to distribute their own proprietary products into our substantial market.

Many foreign companies come to Australia because they can use their intellectual property or business know-how to earn economic rents (profit in excess of that required to justify the investment), so Treasury's free-market modelling doesn't apply.

Google, Facebook and Amazon all earn economic rents, so tweaking tax rates doesn't alter their investment decisions here. In any case, a good number of these companies have found ways of avoiding Australian tax, either through shifting profits to low-tax overseas jurisdictions or strategically-timed market trading.

If you don't pay Australian tax, lowering the statutory rate won't make you invest more.

Comprehensive tax reform should be priority

All this leaves an abiding puzzle.

There are many economic policy initiatives that would significantly enhance Australia's growth, welfare and sustainability.

High on any priority list would be comprehensive tax reform (as advocated by tax authority Ken Henry), including revisiting the unfinished business of a resource-rents tax and comprehensive measures to address avoidance through profit-shifting.

Cutting company tax might be a small element in such a package, but to build an economic strategy on this alone makes no sense.

Economist Stephen Grenville, a non-resident fellow at the Lowy Institute, worked at the RBA for two decades and for the OECD in Paris and Australia's Foreign Affairs Department.