Photo by Christopher Burns on Unsplash

One of the more expensive items in this most important of budgets is the instant asset write-off allowance.

This measure allows businesses with an annual turnover of less than $5 billion to write off the entire cost of eligible new investments in one year for tax purposes, rather than claiming depreciation costs over several years. This allowance alone is projected to cost taxpayers $26.7 billion over the next four years. The Government has included this measure in its JobMaker plan. It significantly extends instant asset write-off provisions already announced by the Government since the onset of the pandemic.

The Government claims that the allowance will get businesses investing again, allowing them to hire more employees as they expand. To be eligible, the asset must be first used or installed by 30 June 2022. The Government has estimated that this measure will apply to $200 billion of new investment. It is expected to induce firms to bring forward investment plans given its time-limited nature, providing a boost to the economy in the short term and raise firm productivity in the medium to longer term.

But will bringing forward firm asset investments necessarily lead to many more jobs domestically in either the short or medium-term?

In the short run yes, but…

In the short-term, new asset investments may increase jobs in those industries supplying, transporting and installing the assets purchased.

But many capital goods installed in Australia are purchased from overseas. According to the Australian Bureau of Statistics (ABS) figures, Australia imported nearly $79 billion in capital goods in 2018/19, while total private investment in new machinery and equipment in Australia was $83 billion during the same period.

The potential boost to the Australian economy from new investments in machinery and equipment is thus likely to be considerably less than the $200 billion figure provided in the Budget Papers.

In the medium to longer-term, the effect of new asset investments on jobs is also unclear.

Many new capital goods use new technologies which require fewer workers to run than outgoing assets based on older technologies.

In some cases, new capital goods directly replace workers via automation. This includes industrial robots in manufacturing, automated warehouses, specialized software and artificial intelligence (AI) technologies and driverless vehicles, among others.

The end result of bringing forward investments in new capital assets may well be fewer jobs in many cases.

Recent research suggests labour-replacing capital goods should be taxed

Recent research by Acemoglu, Manera and Restrepo (2020) finds that the taxation system in the US is biased towards capital at the expense of labour (workers).

This has, in the view of the authors, promoted inefficiently high levels of automation, well beyond the socially optimal level.

But attaining a more optimal level of automation may not simply involve raising capital taxes more generally and/or lowering labour taxes. It may be optimal in some circumstances to impose a tax on automation itself. This may be implemented by imposing an additional tax on labour-replacing capital goods that are ‘marginal’ in terms of their effect on overall firm costs and thus productivity.

This is related to the idea of ‘taxing robots’, an idea previously discussed on this blog in response to taxes favouring capital over workers. But the idea here is distinct in that it does not recommend that all robots should be taxed: just those robots that are marginal in terms of raising overall productivity. By reducing such investments, overall productivity in the economy is affected only at the margin but workers are considerably better off. This may also have implications for equality in the economy. The effect of automation on inequality has also been discussed previously on this blog.

In the paper, taxes on labour are found to exceed those on capital in the US. Two main contributors to the difference in tax rates are: depreciation allowances lowering the tax rate on capital, and payroll taxes raising the tax rate on labour.

A similar exercise calculating effective tax rates on capital and labour may well find the same for the Australian taxation system. These instant asset write-off measures may well swing the balance even further towards capital and away from workers.

JobMaker wage subsidies may disadvantage older workers

The budget also includes a significant measure that lowers the short-term cost of hiring new workers aged 35 and under via a ‘JobMaker hiring credit’. This credit pays firms $200 per week for new hires of unemployed workers aged 29 and under working for at least 20 hours per week. The credit is $100 per week for hires aged 30 to 35.

There are also measures to boost apprenticeship hiring via wage subsidies. These two measures are expected to cost $4 billion and $1.2 billion respectively over the next four years.

We must wait to see whether these subsidies come at the expense of new hires among unemployed workers 36 and older, at the expense of full-time jobs by encouraging jobs just reaching the 20 hours a week threshold, and whether the jobs remain beyond the length of the subsidy program (one year).

Is the Government getting the balance right?

The question we should be asking is: Does the budget have the balance right between measures promoting investment in capital versus measures promoting hiring, if the budget is to be an effective ‘JobMaker’? Should the instant asset write-off provisions be available to all asset investments or should purely job-replacing investments that do little for overall productivity be excluded?

This is something for the Government and the Treasurer to be thinking about.


Other Budget Forum 2020 articles

Blink and You’ll Miss It: What the Budget Did for Working Mums, by Miranda Stewart.

Economic Stimulus through a Gender Lens: Why the Budget Did Not Deliver, by Helen Hodgson.

Progressivity and the Personal Income Tax Plan, by Sonali Walpola and Yuan Ping.

Training Subsidies and Market Failures, by John Freebairn.

Getting Coherence into the Equity Debate – Part 3, by Andrew Podger.

Getting Coherence into the Equity Debate – Part 2, by Andrew Podger.

Getting Coherence into the Equity Debate – Part 1, by Andrew Podger.

What Has Volunteering Got to Do With the Budget? By Sue Regan.

Talk of Aspiration Is Not Borne Out in Federal Budget Papers, by John Hewson.

Asymmetric Taxation of Business Income and Losses, by John Freebairn.

Economic Security for Older Partnered Women and Widows: Fixing Gaps in Australia’s Superannuation System, by Monica Costa, Helen Hodgson, Siobhan Austen and Rhonda Sharp.

Heroic Assumptions in Budget Omit One Major Threat: A Global Debt Crunch, by John Hewson.

Dream Budget or Not? by Shumi Akhtar.

It’s Not the Size of the Budget Deficit That Counts; It’s How You Use It, by Steven Hamilton.

Looking for Bold Reform? Get Rid of Payroll Taxes, by Robert Breunig.

It’s Time to Meet Key Social Policy Challenges in COVID Recovery, by John Hewson.

Meet the Liveable Income Guarantee, a Budget-Ready Proposal That Would Prevent Unemployment Benefits Falling off a Cliff, by John Quiggin, Elise Klein and Troy Henderson.

COVID-19 Strengthens Australians’ Belief in the Fair Go, Government Should Support the Vulnerable, by Emma Dawson.

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