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Tax cuts in exchange for investment? I don’t buy it

It’s at least five-days march in any direction before you’ll find anyone more supportive of what I like to call ‘democratic capitalism’ than us here at The Motley Fool.

Our whole reason for being is that the inbuilt incentives of a well-functioning capitalist economy tend to, on average and over time, provide very attractive returns on the capital that is put to work in businesses all over the country (and the world, for that matter).

And, as a result, people who can save a little from every paycheque would have been well advised, for well over a century, to put that money to work by investing in the share market.

Not day-trading, not speculating, not reading charts.

Investing.

So it chafes, slightly, to be sitting on the other side of a debate involving the ‘peak lobby group’ for large businesses, the Business Council of Australia (BCA).

But here we are.

The BCA, and  some of Australia’s largest companies (and employers), BHP (ASX:BHP), Fortescue (ASX:FMG), Qantas (ASX:QAN), Woodside (ASX:WPL) and Woolworths (ASX:WOW) have penned a letter today as they go into full-court-press mode to convince Australian Senators to back the government’s plan to lower corporate tax, amid reports that it might be one Senate vote away from getting the bill through the upper house.

Now, you and I can agree or disagree on the appropriate level of corporate tax. Frankly, I see little reason for it to be lowered — the list of significant companies that have fled Australia for the US since Donald Trump became president can likely be counted on the fingers of one finger. At night.

The scare campaign of ‘companies will flee’ is almost certainly that: a scare campaign. And let’s say a few leave. Let’s say it’s 10 large Australian businesses. Will that really cost more than lowering the company tax take, on each dollar of profit, by 17% (from 30% to 25%)?

(And who’s going to up-sticks? The miners, whose ore isn’t going to follow? The supermarkets or telcos whose customers won’t take kindly to being told to shop in Kentucky, California or Ohio? The banks, with their cosy margins and oligopoly? The lawyers and accountants whose advice is needed by local firms looking for offshore tax havens?)

So tell me, exactly, why the sudden rush to put the budget at structural risk to prosecute an ideological outcome? (And before you start calling me partisan names, note that I took Bill Shorten to task last week. You’ll need to do better than assuming you know my politics.)

Ah, but tax cuts actually fix the economy, right? They lead to a flood of jobs and profit, right?

Tell that to poor old Kansas, where a low-tax ideology has all-but destroyed a state .

When ideology meets evidence, and evidence wins, you have two choices: you either accept you were wrong and change your mind, or you retreat into “yeah, but…” territory. The latter is indefensible.

Which brings me back to the BCA. Apparently, Woolies can’t get a decent return on its investment without a tax cut. Ditto Woodside and Fortescue.

Man, there must be some marginal investments out there. Can you imagine doing something at a 25% corporate tax rate that you wouldn’t do at 30%?

Because, remember, you don’t pay 30% tax on your revenue. Or even your gross margin. You pay it on before-tax profits. So if that investment isn’t profitable, you don’t pay any tax, regardless of the rate.

Let’s say you put $100 to work for you. You earn a 10% pre-tax return on it. Currently, you’d pay $3 in tax, and be left with $7. The BCA and those companies who added their names to today’s announcement say that if they made $7.50 instead ($10, less 25% in tax), then they’d invest.

Yep, for lack of another 50c, they’d eschew that $7 in profit.

Or so they say.

Does that really sound feasible to you? If it does, you’re far more generous than I am.

It sounds to me like an argument that appeals to people’s perceptions (‘Less tax means more money for jobs’) rather than rational thought.

And if I haven’t quite got you over the line, try this: Since the Trump tax cuts, some very-low wage businesses have stumped up for higher pay. A few have given out bonuses. And most have bought back shares — the very opposite of ‘investment’. I don’t blame them for doing it, by the way; it’s likely the most shareholder-friendly option. But that wasn’t mentioned in the BCA’s announcement.

Those companies who’ve promised to increase investment? My dollar to yours says they planned to do it anyway. It’s like when the government (of either stripe) crows about job creation: with a growing population, it would have happened anyway.

Foolish takeaway

Perhaps the last word on tax-cuts-for-investment should go to Warren Buffett. Writing in a New York Times op-ed back in 2012, the Oracle of Omaha said:

“In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.”

Sorry, BCA. Even if you mean it, both the evidence and common sense mean I don’t buy it.

Motley Fool General Manager Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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