Daily Telegraph 24 January 2017
Australia needs the world more than the world needs Australia. Foreign capital underwrites our lives and therefore the nation cannot afford isolationism.
Covering our ears to ignore Trump’s seismic Christmas tax cuts and the need to secure foreign investment would be a reckless start to 2018.
So many of today’s self-proclaimed “globalists” masquerade under this banner but are actually isolationists.
The Australia Institute, green groups and unions dangerously advocate isolationist economic policy. They demonise foreign investment and falsely argue tax rates do not impact investment decisions, jobs and our quality of life.
These insular groups suggest Australia alone can solve the genuine problem of global tax avoidance by conflating tax rates with multinational avoidance.
The nation’s history holds the answers for the debates of 2018.
We have tried the isolationist or closed shop approach of high tariffs, subsidised production and the lie Australia could swim against the tide by rejecting foreign investment and open markets.
The globalist approach has delivered for Australia as a capital importer. It speaks to the truths that Australia has relied on foreign investment since the First Fleet, the rules based order set down after World War II and our participation in the construction of the UN, APEC and the G-20.
The isolationists have been out talking about the evils of cutting corporate tax in the wake of Trump’s seismic company tax cuts in December. So many of Trump’s detractors have been so obsessed over his waistline and Russia, they are missing the implications of his signature legislative achievement.
Trump has cut U.S. company tax from 35 to 21 per cent virtually overnight.
Australia’s plan is to cut the 30 per cent rate for companies to 25 per cent in 2025.
Tax is a major determinant of investment decisions – the World Economic Forum ranks tax as one of the most significant decision making factors.
The Australia Institute’s advice: pretend it didn’t happen.
There are two inherently xenophobic points the Australia Institute bears in its innumerate argument that “the Australian Govt’s Trump style tax cut means less money for schools and hospitals.”
First, the general demonization of foreign investors.
Australia Institute says “the big winners from the company tax cut are tax avoiders and foreign shareholders. The benefits of the company tax cut mostly go to foreign shareholders…”
Setting aside the poor logic of “tax avoiders” getting a tax cut, the real problem with this rhetoric is the attitude towards foreign investors which built Australia.
No mention here of jobs or better lives which have resulted from the evils of foreign investment in Australia.
Here are the basic facts:
Australia has never had enough capital to develop our nation and we continue to be poor savers. That's why we have $3 trillion of foreign investment stocks in Australia and a national savings gap which has not moved over the past 35 years despite the adoption of mandatory superannuation.
To uphold our current standard of living, we need to attract more foreign investment as our tax and savings base shrinks with the ageing population. We have a small population and we are a high-cost country. Australia competes in world markets for investment and export to survive.
The more specific fact is we heavily rely upon the United States to fund our jobs and lifestyles.
Trump’s tax cuts are material to us.
The United States is Australia’s largest investor with $173.5 billion of direct investments which is 25 per cent of total direct foreign investment (FDI).
There is also a city - country divide which the city slickers and shock jocks don’t talk about.
Often the only game in a small town is foreign investment. It might be a Tasmanian dairy or a West Australian airstrip that wouldn’t have job creating capacity without foreign cash.
Australia’s super funds with $2 trillion in assets barely invest in the bush as they are determined to have a similar low risk asset allocation – a mix of cash, bonds, global and Aussie shares.
Secondly, tax avoidance by large companies, known as base erosion and profit shifting, is no reason to ignore Trump’s tax reforms.
Some large companies have used transfer pricing schemes to avoid paying tax in some jurisdictions. This is wrong and must be fixed.
Yet the only credible approach to deal with global issues such as climate policy or tax policy is via a global agreement. Australia alone cannot solve profit shifting as it cannot solve climate change. The OECD and G20 are working on a global framework to stamp out this problem.
The deliberate conflation of the question of Australia’s company tax rate and the phenomenon of transfer pricing is a handy isolationist tactic which the nation cannot afford.
Our largest investor has materially changed its tax system which determines the nature and level of investment, jobs and lifestyles we can expect in Australia. That is a fact we must accept as globalists before determining the next move.
Andrew Bragg is the author of a monograph on trade policy Fit for Service (Connor Court) 2017 – Twitter @ajamesbragg