Evidence from Trump's company tax cuts in the US shows that wealthy retirees will be the winners, and younger and low-income Australians the losers, if Australian companies are given a windfall.

Treasurer Josh Frydenberg (Image: AAP/Mick Tsikas)

With yet another effort to cut company tax rates for large companies on the Coalition’s agenda and being pushed by big business and its media cheerleaders, what is clear now — much more so than during previous efforts — is the extent to which it will represent another attempt to transfer wealth from younger people and lower-income Australians to wealthy seniors.

In the time since the Coalition abandoned its last attempt to gift some $80 billion dollars over a decade to large companies via a reduction in the company tax rate, we’ve been able to observe the real-world effects of Donald Trump’s massive company tax cut in the United States from 2018.

The hard evidence from the US is that Trump’s company tax cut produced no investment boom, that jobs growth slowed from the last years of Obama’s presidency, that the tax cuts had “a relatively small (if any) first-year effect on the economy”, and that wages growth and bonuses slowed noticeably after the tax cuts.

Curiously, the fall in wages growth in the US after the company tax cuts echoes what happened in the UK and Canada when those countries cut company tax rates — but company tax cut advocates continue to insist they will lead to higher wages growth.

The lack of any impact from the Trump tax cuts is understandable when you realise that they were directed not to additional investment by companies but to shareholders via share buybacks and increased dividends.

Share buybacks totaled an astonishing US$806 billion in 2018, more than 25% higher than the previous record in 2007, and US$730 billion in 2019. Dividend growth also accelerated in 2018 and 2019.

That meant the primary benefit of the tax cuts flowed to wealthy investors — the wealthiest 10% of Americans own more than 80% of US shares — and company executives with remuneration linked to company share prices. That’s why the wealth of America’s billionaires has dramatically accelerated since Trump became president.

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There is no reason to believe corporate tax handouts would have any different result in Australia. Indeed, Australian companies have already been engaging in widespread share buybacks over the last two years. Rio Tinto, ANZ, Qantas, AGL, CSR, Woolworths, Aurizon, Amcor are just some of the companies that have conducted tens of billions of dollars in share buybacks over the last 18 months — despite a stagnant economy and claims from big business that company tax cuts were needed to stimulate investment.

If anything, the pressure to increase share buybacks and pay higher dividends (which would mainly benefit foreign shareholders due to dividend imputation) would only increase if there were company tax cuts.

An interesting, and little-remarked, push during the pandemic has come from wealthy baby boomer retirees — who already receive taxpayer handouts via the franking credits rort — demanding that banks continue to pay dividends to them despite the shutdown of much of the economy and calls from government for banks to play a social role in supporting businesses through lockdown. Extra cash in the form of tax handouts to big business will only prompt more demands for companies to return it to investors.

What will be different in Australia is that we’re not able to run a perpetual gigantic deficit. Trump’s tax cuts pushed the US annual deficit over a trillion dollars while unemployment was already at record lows, leaving it to soar to unprecedented levels as a result of the pandemic. But given the status of the US economy and its currency, no one except fiscal hawks in the US are worried about that, especially when interest rates are at historic lows.

Australia has no such luxury: starting from October, Josh Frydenberg, and his successors, will have to chart a path back to surplus of sufficient size that our net debt to GDP ratio will start coming down again over time.

All taxpayers will have to contribute to that task. But a company tax cut would mean that a greater proportion of the burden will fall on workers, and especially younger workers who will be paying off our current debt for much of their working lives — with investors and wealthy retirees getting the benefit via share buybacks and higher dividends.

In other words, it will be yet another transfer of wealth from younger Australians to older generations, just as is happening via the housing market and its tax distortions, via climate inaction, via health insurance and the HECS-HELP system.

Quite some reward for the sacrifices young people are currently making to protect older Australians.