In its fight against company tax cuts, [the Australian] Labor [Party] peddles the myth that company tax cuts are a windfall for big businesses and their shareholders, this week even launching ads suggesting [Australian PM] Malcolm Turnbull supports company tax cuts because he’ll personally benefit as an investor.
It’s a myth easily debunked. Think about it. What exactly can a company do with the extra money retained from paying less tax? It can only spend profits in two ways: paying dividends to shareholders or spending more on its operations.
Dividends are subject to tax, including withholding tax for foreign shareholders. Suggesting Turnbull or any other investor will get a windfall is a blatant lie.
In fact, many shareholders will pay more tax to make up the greater difference between the company tax rate and their own tax rate. That’s how dividend imputation works, as Labor well knows.
Alternatively, the company can spend more on things like technology, plant and equipment, funding research and development, expanding its sales force or opening new shopfronts or branches. In other words, more money paid in wages to workers and buying goods and services from suppliers.
All of that spending is also taxed. Workers pay income tax. GST [Goods and Services Tax] is collected on goods and services. Suppliers pay company tax or income tax themselves.
Lower company tax simply allows a business to use more of its money on something productive before the money is collected by government.
Nyunggai Warren Mundine, “Bill Shorten’s Labor would kill the reforms of Hawke and Keating”, Financial Review, 2018-06-26.
July 18, 2018
QotD: Understanding how company profits can be used
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