A major study shows most companies just pocket the extra cash from a tax cut

Peter Parks/AFP/Getty Images
  • The first evidence-based analysis on the impact of lower taxes shows the savings don’t help increases wages.
  • More than half the companies just banked the extra cash.
  • Some (19%) used the money to hire more people and another 27% lifted investment.

A study using big data from Australian small businesses shows that company tax cuts create slightly more jobs but the workers don’t see much in the way of a pay rise.

More than half the companies getting tax cuts just banked the extra cash. Just 3% raised the wages of their employees.

Cloud accountancy group Xero and economics consultancy AlphaBeta combined forces to try to gauge the impact of any company cuts in next week’s federal budget. Xero is used by half a million subscribers in Australia for bookkeeping, accounting, invoicing, taxes and payroll.

They measured, using aggregated data from tens of thousands on the Xero platform, how small business wages, employment and hiring changed after the 2015 tax cut which lowered the tax rate to 28.5% from 30% for companies with a turnover under $2 million.

The average benefit from the tax cut, which went to 90% of all incorporated companies, was $2,900.

This is the first time such data has been used and is the first evidence-based analysis on the impact of lower taxes.

The study found:

  • Jobs grew significantly, wages not so much. There was little visible impact on employee wages at businesses whose taxes were lowered.
  • Investment went up but many just banked the savings.
  • A third (34%) of businesses could not say if they got the cut. Lack of awareness of receiving the cut may have affected decisions to hire more people, raise wages or boost investment.

Here’s how the companies used the tax cut:

Source: Xero

“To date, the benefits of tax cuts have been surmised largely through modeling and speculation, with a lack of confirmed data to support it,” says Andrew Charlton, Director of AlphaBeta.

“In this report we directly observe how Australian businesses reacted to recent corporate tax cuts.

“We found that the cuts increased job creation in the short term, found some weaker evidence that they contributed to investment and little evidence that they contributed to higher wages.”

Trent Innes, Managing Director of Xero Australia, says small businesses employ nearly half our workforce and generate a fifth of Australian GDP.

“Tax cuts have been an important incentive the federal government has provided small businesses in the budget over the past few years,” he says.

“However, little data and analysis has been available up until this point on if they’ve actually made an impact. We hope better information will support good policy outcomes for Australian small businesses, this year and in years to come.”

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