26 June 2017
Over the past week Australian shares lost 1.0%, unwinding almost half of last week’s increase. US shares were up 0.2%, developed countries were up 0.1%, while emerging markets rose 0.9%. The Australian dollar lost 0.7% to 75.68 US cents. The 10 year bond yield in Australia fell 0.04% to 2.37%. In the US, the 10 year bond yield fell slightly to 2.14%. The oil price continued its five week slide, down 3.9% for the week and nearly 14.5% over the past five weeks. It ended the week at 43.01 US dollars per barrel. In Australia, house prices rose 2.2% for the first quarter and are up 8.9% year-on-year.
Do company tax cuts result in higher economic growth? This is an important question given it’s a cornerstone policy of the Trump administration. President Trump has proposed to radically reduce the tax rates US companies pay to 15% from 35%. In Australia, there was also recent approval of company tax rate cuts. In March, the Senate approved the Turnbull government’s plan to cut the company tax rate from 30% to 25% over 10 years for companies earning up to $50 million.
The broad thinking is that lower company tax rates encourage investment from both domestic and offshore sources and boosts productivity and employment. This leads to higher standards of living. Australian and US corporate tax rates are higher than those in many other countries with the governments of both feeling that this is hindering investment.
As with most things in economics, company rate tax cuts will help if viewed in isolation. Investment will most likely increase and this will generate greater economic activity.
However one needs to look at the bigger economic picture. How will company tax rate cuts be funded? They may be funded by an increase in other taxes such as personal income tax, which could diminish economic activity, or alternatively the government could reduce spending, which also reduces economic activity.
The setting of company tax rates is an important policy tool for governments. An important decision of any government is where they target their revenue and spending policy, in the context of their country’s specific situation. The overall policy package is more important than any individual component.
David Bell | Chief Investment Officer