Corporate Tax Cuts: Why Bother?

Notwithstanding the conniptions of Bill Shorten, whose political tin ear makes Malcolm Turnbull look like Churchill, Australians are right to ask what is in the Prime Minister’s promised company tax cuts for all of us? Company tax cuts — the ones now on hold — must be good for the economy, right?  Not necessarily, unfortunately.  Even though the larger context of Shorten’s argument – the cack-handed and timeworn class warfare line – has rightly been challenged by many, including, of course, Albo, the likely impact of company tax cuts in Australia will be circumscribed at best.

Here is why.

Donald Trump, that great political enigma of the age, has seemingly pulled off an economic master stroke in the United States.  Following years of limp economic recovery post the GFC and the dead hand of his predecessor’s socialism, Trump’s ascension has brought runaway economic growth, steeply declining unemployment, massive new job creation in the previously moribund private sector, a continuation of the surging stock market, and much more.  And didn’t Trump (with Congress) deliver substantial tax cuts, including cuts in company tax?

The contrast is striking with Australia’s faltering leadership and dysfunctional parliamentary system, all of which makes America’s fractious Congress look like a well-oiled machine by comparison, no small achievement.  Trump has delivered tax reform – real reform – but he has also delivered support for American companies (yes, including the dreaded tariff protection), clear messages and potent action on energy policy, and the prioritisation of practical leadership over economic theory.  American companies are coming home, and those already there are employing people in almost unprecedented numbers. The messaging is unashamedly, and unfashionably, nationalistic. And it is working.  Trump’s sensible actions on the climate scam matter, too.

It is, therefore, the whole package that has achieved cut-through, not just the tax cuts.  Trump, in effect, has fashioned a productive business climate, and an industrial revival of massive proportions, pretty much out of nothing.  The Turnbull approach, on the other hand, is a dog’s breakfast, offering not the slightest chance of igniting an industrial recovery or productive business climate in which Australian corporates, mediocrities that they largely are, will actually invest and employ people.

In America, as Calvin Coolidge put it,  “the chief business of the American people is business.” Trump gets this, unlike the captains of Australia’s ersatz capitalism which goes about its business by endlessly lobbying governments to change the rules in their favour, strutting around appealing to the woke brigade through their corporate sops to the diversity/gay zeitgeist, or in the case of many of our noble financial companies, cheating, defrauding and generally ripping people off, as the banking royal commission is demonstrating with every fresh day it sits.

Why are Australians right to be dubious about Australian companies using tax cuts to create jobs?  There are a number of things that have occurred in our corporate life over the last three decades or so, that, when acting together, have conspired to deliver a second rate corporate culture.

First, big companies (globally) are now net job shedders, and this has been the case since David Birch and others in in the 1980s in the US started researching which companies were creating new jobs.  Birch, with much support from Reagan’s Small Business Administration, began systematically looking at the role of small business in job creation.  He found that it was small businesses that were creating most of the new jobs.  Later research has since established that it is not so much the size of a company, but rather its age/youth that determines the jobs created.  Mature companies shed jobs.  Start-ups and young high growth companies create just about all the jobs.  Big, mature companies find innovation hard, they don’t employ people, and they only grow through mergers and acquisitions.

Second, the post-1990s phase of the post-war globalisation push has embedded off-shoring into the DNA of many companies, especially multinationals, who through modern technologies, the hyper-mobility of resources and remote work, have discovered how easy it is to tap cheap labour and to deploy it through distributed management systems.  These companies have little loyalty to their host countries, or to local customers for that matter. As Roger Scruton has brilliantly pointed out in his recent book, Where We Are Now (2017), the model is to buy local real estate and employ workers from anywhere to make bits of products that get added to other bits of products produced elsewhere and subsequently sold everywhere.

The third factor: following the 1987 stock market crash and other disasters, a corporate culture of racing to the bottom through “rationalising” workforces took hold in Western capitalist countries, including Australia.  This trend was typified by the legendary Al Dunlap, known to his friends as “Chainsaw Al”.  Appropriately, Al’s how-to book was titled Mean Business.  Al would, on behalf of investors and those wanting to buy up cheap businesses, go into a company, strip it of non-performing assets, sack much of the workforce, and present it for sale to someone else.  Since the 1980s, a company’s default strategy when facing a new, ultra-competitive climate with multiple threats and massive uncertainty – the so-called “VUCA” world – is often to sack people.

When combined with the impacts of phase two globalisation and with the in-built tendency of big companies to shed employees rather than to employ more, the Dunlapisation of the corporate world has served to create massive disincentives for large companies to create jobs.

But there is also a fourth trend — the triumphant march through the corporate institutions of the god of shareholder value. This pernicious trend began back in the 1970s with the work of finance economists such as Meckling and Jensen, and was pushed along by corporate leaders like its then “uber hero”, Jack Welch, at the time CEO of General Electric.  It has been described by Forbes magazine contributor Steve Denning as “the world’s dumbest idea”.  The Economist calls it the “biggest idea in business”.  (Welch has since recanted).

The short-termism inculcated in corporate culture by the obsession with shareholder values has been lamented by the guru of disruptive innovation, Clay Christensen, for whom the obsession at least partly explains why supposedly great companies (and whole industries) get shredded by disruptive new entrants at the bottom of the market.  It explains why employees and customers seem to get such little genuine attention from the bloated felines that run our companies and their sycophantic minions in middle management.  It explains the ludicrous bonuses to already overpaid occupants of top-floor corner offices.  It also explains dumb takeovers.

In short, the customer is not king, let alone the poor old faithful, one-company worker.

It is this corporate culture that is meant to respond to Malcolm Turnbull’s limp-wristed tax cuts – a culture where jobs are largely created by new and small companies, where mature industries are begging for disruptions that will kill them, where bloated companies grown fat through mergers and acquisitions seek to recapture shareholder adulation by implementing layoffs (see under “Telstra”), where business models can be thrown out the door through technologies, where financial companies that we are meant to trust are shown to be crooks in well-cut suits, and where even micro-multinationals have close-to-zero loyalty to local workforces.

Give me a break.  It won’t happen.

Until we get a government that understands how economies work and medium-to-large businesses that are truly entrepreneurial and with a bias towards new job creation, what have laughably been described as “historic” tax cuts will have a very, very modest impact on our economic fortunes.  Look to Trump’s America (or Ronald Reagan’s, for those unafraid of history).  Gave across the Pacific and see how it is done.