Trump tax cuts to hit Australian wages

The Trump administration is about to pass the largest overhaul to the US tax system in decades, slashing the corporate tax rate to 20 per cent in a bid to stimulate jobs and investment.

Wall Street soared to record highs on Tuesday on expectations that Congress will pass the biggest changes since Ronald Reagan was in the White House.

The US policy shift has sparked a debate in Australia about whether the Turnbull government should make domestic corporate tax rates more competitive at a time when many developed countries are easing the tax burden on business.

Prime Minister Malcolm Turnbull is planning to cut the corporate tax rate for all businesses from 30 per cent to 25 per cent over the next decade.

Professor McKibbin, who sat on the Reserve Bank board from 2001 to 2011, said that once the Trump changes get through Congress, firms would look to relocate to the US.

"Less investment in Australia will mean lower real wages," he said, adding that if Australia followed the US and cut its company tax rate, "there will be gains for workers and wages will go up because there is more capital being invested in Australia."

BHP chief executive officer Andrew Mackenzie became the latest business leader to call for local tax cuts on Tuesday.

He described the proposed US corporate tax cuts as "a bold move" and said more needed to be done in the West to encourage investments in capital.

"We'll wait and see in the next few weeks how the [US] Senate and the House come together," he told the Melbourne Mining Club. "But I think this is a bold move, and one that I hope will enjoin the rest of the world to follow.

"And if it does it will make me a lot more optimistic about the power of the West, and the demand and the jobs in the future. So for sure, I hope that Australia takes notice."

Mr Mackenzie acknowledged that in Australia there had been "some allowance made for small companies, those with revenues up to $50 million, but I actually think it needs to be expanded to all companies quickly".

"In many cases, most small companies will do a lot better if big companies are investing too. And I think if we do that, we will find more investment happening, and we will make decisions that will favour more investments in Australia as a result."

BHP has been in a long-running $1 billion dispute with the Australian Tax Office over its activities in Singapore, a tax haven.

Mr Mackenzie launched a vigorous defence of the miner's taxation position, saying it made a "phenomenal contribution to the Australian economy" and did a "wonderful job" at distributing wealth across society.

"We actually paid $66 billion, let me say that one more time, $66 billion in tax in the last 10 years in Australia. That's an effective tax rate of 34 per cent, and if you include royalties it's about 44 per cent," he said.

A survey by the Business Council of Australia found 81 per cent of CEOs said they would increase investment if taxes were cut, while 70 per cent said they would hire more staff.

Modelling by Professor McKibbin and his colleague Andrew Stoeckel for the Washington DC-based Brookings Institution showed the larger government deficit caused by the tax cuts will increase US debt to trillions of dollars. The higher corporate borrowing to fund the extra investment would put upward pressure on interest rates, he predicted.

"What it means for Australia is a one-percentage-point long-term interest rate rise [above the current record low of 1.5 per cent] and a depreciation of the Australian dollar," he said.

He warned any tax cuts had to be made revenue-neutral by cutting government spending. Mr Turnbull has also raised the prospect of income tax cuts next year.

"What it does is what the Reagan tax cuts did, transfer demand from the future and other parts of the world to the present - you are just creating a problem down the road," he said.

"The whole idea that you just cut corporate taxes and that is your answer to solving most problems is a flawed argument, you need to fundamentally tax things differently."

Professor McKibbin called for wholesale reform to encourage taxation of consumption, such as the GST, rather than paying more "income tax for working".

The Australian National University academic said the US tax cuts where a fundamental income redistribution by the Republican Party that would favour the wealthy.

"But what I don't think the US understands is because their economy is so open, even if you have more production in the US, it won't necessarily be owned by America," he added.

Professor John Freebairn, second from right, with Dr Ken Henry, far right, during the Henry Tax Review in 2005. Photo: Andrew Taylor

John Freebairn, a key adviser to the Henry tax review, said a large majority of companies operating in Australia were owned by locals. He argued that a corporate tax cut to 25 per cent was not going to have the widespread effect on foreign investment the Turnbull government has been promoting.

"Some investment is not going to choose Australia but it does not mean that all investment is going to disappear," he said.

The Melbourne University economics professor said the risk was new foreign-owned technology companies not investing in Australia.

"For the high-tech company that could set up in Australia or Silicon Valley or Singapore ... the US is suddenly going to look more attractive."

The University of Sydney's Antony Ting said taxpayers where sceptical of companies spreading benefits to workers.

"The problem is that over the past few years many employees are not seeing a major increase in salaries and they are very sceptical about trickle-down economics," he said.