Donald Trump’s tax plan may harm Australia’s economy if the government responds in the wrong way, the Australia Institute has warned.
In a report delivered to senators last week the progressive thinktank said the government should not try to cut Australia’s headline company tax rate to compete with Trump, dismissing concerns that a US cut of its corporate tax rate to 20% would lead to capital being withdrawn from Australia.
The treasurer, Scott Morrison, has written to hundreds of Australia’s chief executives encouraging them to support the Coalition’s plan to cut company taxes.
Morrison sent an 80-page booklet, comprising copies of five economic speeches he has given since July, to the business bosses to remind them of the government’s economic vision for Australia, and warning of the economic consequences of a future Labor government.
The Australia Institute’s executive director, Ben Oquist, said Trump’s tax package should not be used as justification to cut Australia’s corporate tax rate at a cost of $65bn to the budget.
“Australia is likely to have nothing to fear from the cuts in headline tax rates, but other elements of the Trump plan could have negative effects,” Oquist said. “Many respected economists in the world are lining up to argue that the Trump plan will not work to increase either jobs or economic growth in the US.
“The devil is in the detail of the Trump plan. For example, import protectionism and territorial tax treatment pose significant risks to Australian revenues and trade.
“US companies with Australian operations could have new incentives to move those operations out of Australia. Even the IMF is warning of the dangers of a company tax ‘race to the bottom’.”
On Monday the International Monetary Fund said conditions seemed right for a pickup in growth in Australia but warned it would only be modest, with record low wage growth weighing on household incomes.
It predicted Australia’s ultra-low interest rates would persist for years, and a sustained rise in inflation would come about only when the economy had been at full employment “for some time”.
In the Australia Institute paper, its senior research fellow, David Richardson, criticised Treasury’s recent argument that if a substantial cut in the US corporate income was not financed by US domestic saving, it would initially have to be funded from the existing global supply of funds, meaning the rest of the world would get less investment.
“The idea that a US investment boom will harm Australia certainly seems counterintuitive,” Richardson said. “We have a recent example to compare with that scenario. It has now been many years since Australia has received the benefit of the Chinese investment boom and there is still no sign of the Chinese economy inducing a massive capital inflow from Australia to China.
“Indeed, ... over the last decade Australian investment in China increased from $1.1bn to $68.7bn while Chinese investment in Australia increased from $3bn to $87.9bn.
“The net effect was an increase in Chinese investment in Australia from $1.9bn to $19.2bn. So far from the Chinese investment boom draining capital from Australia the opposite happened.
“If the effect posited by Treasury does exist it is not large enough to nullify the benefits to Australia of the Chinese investment boom.”
