Raise your hand if you like the sound of a tax cut.
As an investor, the one we’re about to explore may affect you directly.
Prime Minister Malcolm Turnbull may be one step closer to passing corporate tax cuts. This comes after One Nation’s Senator, Pauline Hanson, backflipped and announced she would back the company tax plan.
Ms Hanson struck a deal with the Turnbull government. They will fund a program where 1,000 apprenticeships will be funded by taxpayers in big business.
Independent Senator Derryn Hinch has also come around and backed the tax cut. However, he will only support the bill if it means a wage increase for workers.
You may dismiss this move as a straightforward imitation of US President Trump’s much-publicised tax cut. But our government argues that the ball has been rolling on this in Australia for much longer.
Treasurer Scott Morrison commended the US for taking on Australia’s corporate tax plan, from the G20 summit meeting in Argentina:
‘We will return to surplus in 2020-21, that is the reason why we’re only one of 10 countries with the AAA credit rating from the three major agencies and we’ve stuck to that track while at the same time, being able to absorb having lower tax rates for business…
‘We’ve already legislated half the package for businesses up to $50 million and we’re seeking to extend that to the broader economy and we actually commenced that process actually back in 2016 so I’m glad the Americans decided to follow us’.
But what does this tax cut plan mean for Aussie businesses and workers?
Well for businesses, it means a reduction in tax from 30% to 25% by 2026–27.
But if we look to the US, we get a glimpse of Australia’s possible future.
In the US, they cut corporate taxes from 35% to 21%. And according to the Business Council of Australia’s chief, Jennifer Westacott, as reported by SBS, Trump’s tax cuts are beginning to change America’s ‘economic landscape’.
Ms Westacott told Sky News last month:
‘There is no doubt that reducing taxes drives investment, drives higher wages, creates more jobs, that’s what US companies are telling us…
‘It’s real, this is happening, it’s not trickle-down economics, this is actually having a huge effect on the US economy.’
However, the difference is that Australia may not see those results as quickly as the US did. While the US tax cuts were immediate, Australia plans to lower the tax rate over a span of a decade.
And according to Treasurer Scott Morrison, as reported by the Financial Review, these tax cuts will eventually benefit the Aussie economy:
‘And that comes in many different forms. It comes in employee benefits as it has here in the United States, it comes through increased investment and expansion and job security, increased investment in innovation and research, and technology that actually helps people to be more productive, lower prices’.
Aussie workers could too be the beneficiaries of a company tax cut. Higher wages could be the biggest benefit for workers. As Mr Morrison told the Financial Review:
‘Now, wage benefits will come from that outcome. Wage benefits would come from an initial direct pass-on, which, you know, many companies have chosen to do here.
‘So the wage benefits can come in multiple stages. But the one thing I do know — because I think the counterpoint has to be explored — do people get paid more by keeping company taxes higher? Well, of course not. Do wages go up in businesses that aren’t able to be as profitable? Well, of course not.’
Whether you believe that the company tax cuts will be beneficial for Australian workers or not, you can’t deny that it’s already working in the US. It’s only a matter of time until our government passes the company tax cut bill.
The benefits for our corporate landscape are obvious. Which means benefits for investors, too. For ideas on how you could grow your wealth through fast-moving, small Aussie companies, check out Sam Volkering’s Australian Small-cap Investor here.
This week in Money Morning
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In Friday’s Money Morning, Harje informs readers that overnight the US Federal Reserve increased interest rates from 1.5% to 1.7%. At the same time, the Fed also announced they’ve increased their economic growth outlook for the next two years. But as Harje points out, the bigger deal was how the markets reacted to the news. To find out more about the markets reactions and the snowball effects these predictions by the Fed will bring, click here.
Editor, Money Weekend