Stephen Long reported this story on Monday, May 16, 2016 18:35:00

TONY EASTLEY: Research claiming that the Turnbull Government's planned company tax cuts would deliver a multi-billion dollar tax windfall to the US Treasury has caused quite a stir.



The Government has dismissed the modelling by the Australia Institute as fanciful.



The Business Council of Australia says it's theoretical and ideological.



But the Council itself is facing questions over why it maintains that a company tax cut will lead to more jobs, when Treasury modelling says otherwise.



Our economics specialist Stephen Long spoke to Business Council chief executive Jennifer Westacott, who began by critiquing the Australia Institute's research.



JENNIFER WESTACOTT: Well this is a highly theoretical report and it looks at one trading partner, when we know we're now operating in global economy and it runs in the face of evidence from Treasury, evidence from the OECD, evidence from Ken Henry's very comprehensive review of the tax system.



But lowering the company tax rate in Australia will encourage investment, which will flow through to workers through higher wages and increased job activity.



STEPHEN LONG: None of the sources that you cite actually looks specifically at our tax treaty with the US and how much revenue we would forego.



Do you have a specific critique of the numbers in the Australia Institute report?



JENNIFER WESTACOTT: Well, well Ken Henry's report did look at the tax, foreign tax credits, and they did make a comment on the US and their view was that this was, you know, the impact was likely to be limited.



So, you know, to me, this is a red herring report with a very ideological bent that's opposed to making the business environment better for small, medium and large companies in Australia.



And we've got to remember, that you know there is a huge body of evidence that says lowering our business tax rate is good for our economy, it will increase GDP by 1 per cent - which is $16 billion in today's terms - this will flow through to workers, this will flow through to higher paid jobs.



STEPHEN LONG: The treasury modelling you rely on actually shows negligible gains in employment, 0.1 of 1 per cent in the long run.



JENNIFER WESTACOTT: Well you know, you're going to get a $4 billion kind of uplift in wages, that's 50,000 jobs in today's terms.



STEPHEN LONG: Where do you get that number from?



JENNIFER WESTACOTT: An analysis that we did for the business council.



STEPHEN LONG: The Treasury modelling actually starts from the assumption of full employment.



Of course it's going to find that there'll be wage rises, because it's starting from that unrealistic assumption.



JENNIFER WESTACOTT: But, but we're going to grow our economy by 1 per cent and we know that when we grow our economy, we increase the revenues to government, we increase the capacity for wages growth and we increase the capacity for job creation.



STEPHEN LONG: You say increase the revenue to government; all the modelling shows that there will actually be a cut to government revenues stemming from a company tax cut in the billions of dollars and that will have to be made up either by levying other taxes or by cutting government spending in coming years.



Do you think the public understands that?



JENNIFER WESTACOTT: No serious economist is doubting that the economy gets bigger.



STEPHEN LONG: Over the very long run by about 1 per cent on optimistic modelling.



JENNIFER WESTACOTT: A $4 billion increase to government revenues.



STEPHEN LONG: Chris Richardson has said there will be $16 billion lost in government revenue a year, once this fully flows through.



The modelling from Treasury, from Chris Murphy, from Independent Economics who advised treasury, all shows that you'll have significant cuts to revenue and that will either have to be made up by new taxes or cutting the government spending and the modelled gains come in the very long run.



JENNIFER WESTACOTT: But what's the alternative? That you leave the company tax rate as an incredibly uncompetitive rate, in which case you do not give businesses who employ 10 million Australians a chance to compete in a very difficult global economy.



You do not give our companies a chance to get ahead.



STEPHEN LONG: The modelling that you rely on assumes that a company tax cut will lead to more foreign investment, that leads to higher labour productivity and that leads to wage rises.



But in the real world, the wages share of national income has been falling throughout the advanced world, despite rising productivity.



Why isn't the real world a better guide to what will happen than your theory?



JENNIFER WESTACOTT: But in Australia our multi factor productivity has been stagnant for quite some time...



STEPHEN LONG: And labour productivity has been running at 2.5 per cent in the private sector, that's quite high but we've got the lowest growth on record.



Where does this assumption come from, that company tax cuts produce high labour productivity, produces wage rises when in the real world, wages have been stagnant, whilst productivity has been rising?



JENNIFER WESTACOTT: Yes, labour productivity, how do you get increased productivity if companies don't have an incentive to invest in improving their equipment, in improving their efficiency?



This is one factor that we can control in our economy, that we can lower the business tax rate, make our companies more competitive, encourage them to invest, which leads to more efficient workplaces which leads to greater productivity.



It’s one tool we can control and we should control it.



TONY EASTLEY: Jennifer Westacott from the Business Council, speaking to Stephen Long.