ACT’s corporate tax cut number confusion

It’s hardly surprising that ACT has released a policy involving the reduction of corporate tax. Promising not to cut taxes – that would certainly be one for the books…

The NZ Herald reports:

The Act Party wants to cut the company tax rate from 28 per cent to 12.5 per cent by 2020, which it says will see a rush of business activity that would boost jobs and wages.

“No single measure could do more to promote the economic welfare of New Zealanders than cutting the company tax rate. And it is relatively easy, because company tax raises far less revenue for the government than income tax and GST.”

Dr Whyte said reducing the company tax rate from 28 per cent to 20 per cent next year would cost $1.53 billion in lost revenue – which would be made up by scrapping all Government funding to business interests, or “corporate welfare”.

Cutting the rate further by 1.5 per cent a year would cost about $150m in lost revenue. By 2020, the company tax rate would be 12.5 per cent.

The problem is that the numbers don’t match up.

Treasury predicts corporate tax revenue in 2015 to be approximately $9.8 billion. Dropping the corporate tax rate to 20% in the first year would drop that tax take to about $7.0 billion, a drop of $2.8 billion. That’s well above the $1.53 billion in lost revenue that ACT are forecasting in the first year.

Of course, ACT are predicting that decreasing corporate tax rates will increase economic growth, which means that lost revenue will in fact be less than $2.8 billion. ACT estimates that each percentage point reduction in corporate tax results in a $220 million loss in Treasury revenue, which ends up being only a $150 million loss “when you take into account the fact that a lower company tax rate will expand the economic base to which it is applied and increase the dividends and wages subject to incomes tax” (quote taken from Jamie Whyte’s speech – link here).

But applying that formula to ACTs initial 2015 corporate tax rate decrease of 8% yields a loss of just $1.2 billion. Whichever you look at them, ACT’s figures for the first year (based on their own calculations) don’t seem to add up.

In fact, their figures don’t seem to work for subsequent years either. Just look at the table below, again taken from Jamie Whyte’s speech notes.

Table 1: Revenue forgone from a lower company tax, $million

Tax rate Lost revenue Funded by

2015

20.0%

$1,530

Abolishing corporate welfare ($1.5 billion) and carbon trading ($164 million)

2016

18.5%

$154

Part of the $1.5 billion of new spending in the Budget

2017

17.0%

$153

As above

2018

15.5%

$150

As above

2019

14.0%

$150

As above

2020

12.5%

$150

As above

Mr Whyte’s speech says that every 1% decrease in the corporate tax rate will result in a $150 million loss in revenue to Treasury. Yet, his table shows a $150 million loss per 1.5% drop in the corporate tax rate.

Over at the Standard, Micky Savage has posted on “ACT’s voodoo economics“. His self-described “quick calculation” regarding the loss in Treasury revenue doesn’t appear to include any factoring in of increased economic growth, but the interesting part of the post is his update:

ACT candidate Stephen Berry has provided me with some more details of the policy.

  • The cut in the first year will be to 20% at a cost of $3 billion.
  • The initial shortfall will be funded by further asset sales.
  • The 12.5% rate will not be reached until 2020 and they presume that the enhanced growth rate will fund this.

Still does not add up …

It appears ACT’s Stephen Berry doesn’t know the details of the policy either. His estimate of the first year cost to Treasury is almost double that of his leader’s. Further, Mr Whyte says the first year loss will be completely covered by “abolishing corporate welfare and carbon trading”, while Mr Berry thinks further assets sales will be needed to cover a shortfall.

I’d also note that if the corporate tax rate becomes wildly out of synch with personal or trust tax rates, there will be a huge incentive for individuals to set up companies, channelling income through a company at a lower tax rate than if they syphoned it through a trust or declared it as personal income. Such distortions will also impact on ACT’s figures, although there’s nothing in Mr Whyte’s speech to suggest that this has been factored in.

ACT’s figures on this issue look dodgier by the hour.

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