Investment bank says only 30% of the money forgone in corporate tax cuts is likely to contribute to economic growth

The investment bank once chaired by Malcolm Turnbull has backed the view that much of the benefit from the Coalition’s company tax cuts could flow to offshore investors, as the prime minister insisted his plan was the best way to ensure continued economic growth.

Responding to figures released on Wednesday showing a stronger-than-expected annual growth rate of 3.1%, Turnbull said the result was “so far so good” but had not “happened by accident” and required the incentive of his company tax cut plan to be maintained.

But in an economic research note, Goldman Sachs found that if companies distributed the value of the tax cut as profits or dividends to investors then 60% of the benefit would flow to offshore investors, 10% to domestic investors and around 30% to the Australian economy.

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The domestic benefits would be far bigger if companies used the tax cut to grow their business but Goldman Sachs said “survey evidence suggests that companies are less likely to voluntarily lower the dividend payment ratio”, meaning the real world impact was likely to be closer to the scenario where 60% of the benefit flowed offshore.



Goldman Sachs’ calculations of the impact of Australia’s system of dividend imputation on the tax cut plan comes after the Grattan Institute and Australia Institute think-tanks also highlighted the likelihood that companies would pay out a large proportion of higher profits rather than increase their domestic investment, and the particular benefits this afforded foreign investors.

Late on Wednesday, the Greens released costings by the Parliamentary Budget Office showing the government’s plan to cut company tax would cost $51bn over ten years – $3bn more than Treasury has said.

Turnbull, who was chairman and managing director of Goldman Sachs Australia between 1997 and 2001, said he had not read the Goldman report but “the important point is that if you deliver a better return on investment then you get more investment”.

“I think sometimes the Labor party imagine that Australia is in some kind of bubble. Sealed off from reality, sealed off from the rest of the world ... where you can deny companies tax cuts and investment won’t be affected.”

But the former Liberal leader John Hewson raised similar points to Goldman Sachs in a radio interview Wednesday, and said the Coalition needed to provide more evidence to prove that the tax cuts would boost investment.

“There is obviously a debate always about when you cut taxes where the benefits go,” Hewson said. “There is a suggestion of course that a company tax cut goes predominantly to multinational corporations who may not contribute anything more to Australia. They may not employ more Australians, they may not invest.

“The world hasn’t seen a significant pick-up in investment despite the fact that we have had near zero interest rates in most developed countries. So is it tax that is going to make a difference to that? I’m not sure, I think it’s a bigger issue.



“It does go to foreign shareholders. But the assumption is that those companies operating in Australia will expand their investment and they will employ people. That needs much more debate and evidence,” he said.

After weeks of Labor’s attacks that the tax cuts policy benefits the “big end of town” and “big banks”, Turnbull and the treasurer, Scott Morrison, have in recent days emphasised that the first beneficiaries will be small “Mum and Dad run” businesses and that there would be several more elections before the biggest businesses benefitted.

“The biggest companies won’t get a tax cut for eight years. There will be three elections between now and then. The beneficiaries of our tax cuts in the near term, over the next six or seven years are all smaller companies, and particularly over the next three years, they are overwhelmingly Australian-owned family businesses,” Turnbull said on Wednesday.

But a government spokesman confirmed the government would seek to legislate the full 10 years of the tax cuts as soon as possible, if the coalition was re-elected.

And the Council of Small Business of Australia has warned only a small minority of family businesses would reinvest the tax cut.

Cosboa, which strongly supports the coalition’s policy, has said “only about 40,000 of the 870,000 small businesses getting a tax cut under are likely to use the bonus to expand their operations” with the rest using the bonus to increase profits or dividends.

Goldman Sachs said the long lead time meant the tax plan could not be the only answer to the need to boost growth in the non-mining economy.

“If the objective is to boost near term economic growth, then a company tax cut that commences in 8 years time will likely still need to be supplemented by further demand management policies...in the interim,” it said.

Asked about the report, Labor leader Bill Shorten said; “Mr Turnbull’s old bank that he worked for has come out with this report ... it says in one sentence that 60% of this tax giveaway of Mr Turnbull’s is going to go to overseas shareholders. So the choice in this election is... you can spend more money on a health care system, Medicare, cheaper medicine, or you can give it away to foreign shareholders and big banks, the choice couldn’t be clearer in this election.”

The Greens said PBO costings of the cost of the tax cuts showed they would be more expensive than the government has said.

“It’s a death blow to the argument that company tax cuts are affordable,” Greens Treasury spokesperson Adam Bandt MP said.

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The treasurer, Scott Morrison, responded to questions about the exact benefit of the tax cuts by saying every bit of additional economic growth was a benefit.

“In this tough economy you take every inch of growth you can get. You take every job you can get,” he said. “As a government, we’re not going to be dismissive of the ability to increase investment and the jobs and the growth that comes from that. I get the sense from Bill Shorten that somehow there’s some growth he is not happy to have. Every inch of growth matters as small or as large as it can be. We will fight for every inch of growth, every job that can be created as a result of our tax plan and our broader national economic plan.”

Turnbull was chair and managing director of Goldman Sachs Australia from 1997 to 2001 and a partner with Goldman Sachs and Co from 1998 to 2001.