Will tax cuts really allow Qantas to purchase more planes? AAP
Research shows that tax cuts lead to increases in corporate investment. But analysis of Australian companies’ financial statements, and what American companies have done since the Trump tax reform, show this increased investment could be rather small.
High-profile Australian CEOs have been campaigning for company tax cuts, claiming it would lead to more corporate investment, jobs and even wage rises.
But it is unlikely that a lower tax rate will be a key driver of investment. Especially as companies like Qantas have already announced billions in investments.
The idea behind tax cuts driving investment is that they create more “free cash flow”. This is the amount of cash a business generates from its day to day operations minus what it spends on capital expenditure (property, equipment and maintenance for example).
Studies show more free cash flow does, on average, lead to increased investment. But the extra cash is also used to pay down debt, pay dividends and increase working capital (cash used for day to day expenses).
Qantas CEO Alan Joyce has been one of the most vocal proponents of corporate tax cuts, claiming it could lead to new routes and the purchase of new aircraft.
This is plausible, but a 5% tax cut is not likely to lead to huge increases in profitability or cash flows for Qantas. At least in the short term.
Qantas will not pay tax until its profits in the years after 2014 exceed the tax losses recorded before 2014. Only once these tax losses have been used up will a lower tax rate lead to an increase in cash flow.