Five reasons to say no to more corporate tax cuts
Least effective job creation measure
According to the nation’s official number crunchers, if you want policy to encourage job creation, cutting corporate taxes is the weakest option (20 cents growth from every dollar of tax cut). Spending on infrastructure has the most impact ($1.50 on every dollar spent). Finance shows spending on income supports for the unemployed and low income Canadians has an equally big pop, and housing initiatives are almost as good ($1.40 for every dollar spent).
Little Impact on investments
Federal corporate tax rates have fallen from 28 per cent in 2000 to 18 per cent in 2010. Business investment (in non-residential structures and equipment) as a share of GDP was 12.4 per cent in 2000. It was also 12.4 per cent in 2009, and on track for the same in 2010.
Pay more tax to cut taxes
Since Fall of 2010, the Harper team has been saying corporate tax cuts “pay for themselves” in closed-door meetings like these. But Budget 2009 figures show reducing the general corporate tax rate from 22.12 per cent in 2007 to 18 per cent by January, 2010, removed $6.7-billion annually from public coffers, right through the worse of the recession. Cutting the rate further this year, to 16.5 per cent meant another $2.8-billion in foregone revenues annually. The Harper team’s commitment to reducing the corporate tax rate to 15 per cent ultimately reduces the size of the public purse by $13.7-billion annually by 2012, according to Finance estimates, at which time the federal budgetary deficit will be between $21- and $26-billion (the range of Finance, PBO and IMF estimates). Financing this tax cut requires borrowing more money. The average Canadian taxpayer will pay interest on the borrowed money to provide a tax break for profitable corporations.
The Harper government viewed infrastructure spending as an extraordinary one-time stimulus measure.
The question of working capital
Finance Minister Jim Flaherty says Canada’s tax rates on new business investment are the lowest in the G7. Erin Weir’s blistering riposte to Jack Mintz shows our corporate tax rates among the lowest in the developed world. Who are we competing with? It’s time for a reality check: Canada’s corporate sector is sitting on a growing pile of capital. In the recessions of the 1980s and 1990s the business sector was a net borrower of cash to cover their costs, as one might expect during lean times. In contrast, during this recession the business sector just kept generating bigger and bigger surpluses. In 2007 the net surplus of the sector was $43-billion. By 2008, it was $57-billion and by 2009, $59-billion. By third quarter 2010, $51-billion was generated in surplus. That’s the surplus in the annual flow. The accumulated stock of ready cash (currency, deposits and short term paper) in the non-financial corporate sector had grown to $489-billion by third quarter 2010. That’s a lot of money. When it finally gets put to work, we are likely to witness a wave of corporate consolidation. But mergers and acquisitions don’t necessarily create jobs in Canada. ...
Liberal corporate tax plan just election bumph
We stick it at 18 per cent, … The rate as of January 1, 2011 is 16.5 per cent. Going back to 18 per cent is an increase, not a pause. The scheduled decrease to 15 per cent in 2012 has been law for a couple of years now, and since major investment projects involve lead times measured in years, stopping now has almost the same effect as an increase. We cannot ‘stick’ at 18 per cent; we have long since moved past that point.
you save $6-billion, … The Liberals seem determined to repeat this number, so it’s important to remember that it means approximately nothing. As far as anyone can tell, its source is the Department of Finance’s October 2007 fiscal update. In Table 3.5, the projected tax relief of the reduction from 18 per cent to 15 per cent for the fiscal year 2012-13 is around $6-billion. There are several problems with this estimate:
• It is based on a 2007 projection for 2012-13. In 2007, corporate income tax (CIT) revenues per CIT rate percentage point were in the stratosphere and still rising; projections for the future were correspondingly optimistic. Using the same approach using more recent data, the PBO puts the sacrificed revenue on the order of $4.6-billion.
• It is based on static analysis, in which it is assumed that there are no behavioural responses to the policy change. As noted here, this is an extremely odd assumption to make in this context. The most important reason for cutting corporate income taxes is to induce those responses: higher productivity, wages and income. Higher incomes will produce higher tax revenues that will partially offset those lost to the CIT cuts.
• It ignores the potential for tax shifting. Multinational firms may choose to book revenues in Canada in order to take advantage of the lower rates, thus increasing the size of the corporate income tax base and therefore revenues. (To my mind, this is the weakest of the arguments in favour of cutting the CIT rate, since it amounts to playing a zero-sum game with other tax jurisdictions. But as long as other countries don’t respond, it’s still an important point to remember.)
My own rough guesstimate for the size of the effect of reducing the CIT rate from 18 per cent to 16.5 per cent on the federal budget balance is something on the order of $1-billion: ...
If you look at the G&M comments section for each article, there's a lot of moralism that doesn't even pretend to masquerade as analysis. While Gordon has addressed tax incidence elsewhere, I haven't found anything to that effect by Yalnizyan and Weir.
The arguments are largely theoretical, but they go like this. In a small open economy, the profit rate is in equilibrium to the world rate. If you increase corporate income taxes, then to attain the same profit rate labour income will be reduced, perhaps not in the short term, but the long term, since capital is relatively mobile and labour relatively immobile.
Surely it's an important question. If CIT is ultimately shifted onto workers, at least in large part, would not GST and PIT increases be more economically efficient?