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Do tax cuts lead to economic growth and higher wages or don't they?
Scott Morrison spent 12 months relying on economic modelling to claim it did, but now he says we shouldn't rely on modelling as it's all common sense.
His problem is that neither modelling nor common sense provides much support for the centrepiece of his Government's plan for "jobs and growth".
In February this year the Treasurer was still a fan of economic modelling, claiming that: "Modelling has shown that half of the benefits of the tax cuts would flow through to workers through higher real wages, a necessary boost to workers given subdued wages outcomes."
Last year he had such confidence in economic modelling that he was quoting results to two decimal places when he told us that for every dollar we cut in taxes the economy would grow by $2.39.
But things move fast in modern politics, and this week the Treasurer was busy explaining to us why the Government didn't need any modelling to know that its tax cut for businesses with turnover of up to $50 million was good for the economy.
"The Government doesn't need to be convinced about the need to give small and medium-sized businesses a tax cut," according to Mr Morrison.
"The Turnbull Government knows how business works, we focus on the things we know make a difference because of our life experience and our background in business."
Did you see what he did there?
The Treasurer finally admitted that when it feels like a policy will work there is no need to model its impact on the economy before spending billions of dollars.
Indeed, the Treasurer didn't just play the 'common sense card', he went full populist stating that, "If you go down to the pub and talk to small business people, they're not talking about econometric models."
Community no longer believes economic modelling
So what's changed?
On a communications level the Treasurer has finally admitted the politically obvious - voters are no longer persuaded by politicians waving economic modelling around.
Over the past few years people have become acutely aware of the adage "garbage in - garbage out" and, in response, are rightly cynical about claims that the best way to boost wages is to give big businesses a tax cut.
No matter how much modelling he could cite, the Treasurer never really found a way to convince people that giving the big four banks a $7.4 billion tax cut would lead to higher wages for bank tellers and lower fees for bank customers.
On an empirical level, the Treasurer likely knows that were Treasury to model the economic impact of the new tax cuts for small and medium-sized businesses with turnovers of less than $50 million they would find that there aren't any.
Which would, of course, be a bit embarrassing.
The reason we have a very good idea of what Treasury modelling of the new tax cuts would show is that we can refer to its recent modelling of the likely benefits of a cut in the corporate tax rate for all businesses.
Treasury found that the "increase in GDP is mainly driven by greater foreign investment flows into Australia".
They also found that the increase in foreign investment would lead to higher productivity, which they assumed would be passed on to workers in the form of higher wages.
The problem for the Treasurer is that, as his new tax cuts only apply to small and medium-sized companies, they will do virtually nothing to attract new investment from big foreign companies.
As the Treasury modelling shows that both the direct benefits in terms of investment and the indirect benefits in terms of wage rises are both dependent on new foreign investment it's pretty clear that if Treasury were to model the economic impact of last week's tax deal they would find little, if any benefit.
Hence Mr Morrison's determination for Treasury to not examine the new plan.
Company tax cut doesn't address major economic problems
There are 738,900 unemployed people in Australia. The arteries of our rapidly growing cities are clogged by 20 years worth of underinvestment in transport infrastructure.
We have one of the slowest broadband networks in the world. Our kids are slipping down the world educational league tables and hundreds of thousands of parents, mainly women, are staying out of the workforce because our experiments with childcare deregulation have failed.
Australia has real economic problems which, if left unaddressed, will cause even greater harm in the future.
But instead of directly addressing the major problems that we face, the Turnbull Government, based on its perception of how business works, seems determined to rely instead on the idea that if it succeeds in cutting tax revenue the benefits will trickle down and cause economic growth.
Mike Keating, a former Secretary of the Departments of both Finance and Prime Minister and Cabinet, recently wrote that "company tax has been cut by a lot over the last few decades in a lot of countries, but in no country was there a significant impact on investment, output or employment".
Scott Morrison is willing to bet tens of billions of dollars that his gut feeling about corporate tax cuts is right. Only time will tell whether the voters or the economy respond in the way he expects.
Richard Denniss is the Chief Economist for The Australia Institute @RDNS_TAI.
Topics: tax, economic-trends, business-economics-and-finance, small-business, australia