We’ve been told for years that corporate tax cuts would work like viagra to boost private sector investment and productivity, and no doubt we’ll hear much more about it in next week’s budget.
But it just ain’t working.
Today’s release by Statscan of private and public investment intentions shows just how limp private sector investment is expected to be in the coming year. This is despite the pretty strong rebound in corporate profits we’ve recently seen and that is expected this year and next.
Private sector non-residential capital investment is only expected to increase by 2.8% in 2010. If you take out the increase related to the mining & oil and gas sector and manufacturing related to oil and gas, then it even looks like there will be a decline compared to last year’s low rates.
This is despite expectations of an increase in pre-tax corporate profits of 15% this year and 16.5% next year, according to RBC’s latest forecast and a decent rebound in profits in the past two quarters.
After tax corporate profits are set to rise even faster, with Harper and Flaherty’s corporate tax cuts giving up $8.6 billion in revenues this year, rising to almost $15 billion in 2013/14, as Erin has showed.
This story–of deeper and deeper corporate tax cuts, but sluggish private sector investment and stagnant private sector productivity in Canada–is nothing new.
I’ve just looked back at the public and private capital investment series numbers from Cansim and they show a similar, if not more pathetic, story.
Paul Martin’s 2000 tax reform budget cut the federal corporate income tax rate from 28% to 21% over five years, together with cutting capital gains and high income tax rates. Flaherty now wants to cut this corproate tax rate down to 15% in the next two years.
During this time, from 2000 to 2010, private sector non-residential capital investment will have increased by only 26%, despite a 60% increase in the size of the economy during that time and of course much lower interest rates. This compares to a 170% increase in public sector investment.
And it’s not just the impact of the recession. From 2000 to 2008 (its recent high), private sector non-residential capital investment in Canada only increased by 54% compared to a 116% increase in public investment.
What’s going on here?
We’re told over and over again that we need to cut corporate taxes to make Canada competitive and attract investment, and it seems ot make sense, according to simplistic economic theory.
My impression, from having dealt with corporations seeking public bailouts from the Ontario government during the 1990-91 recession, is that most corporate managers and executives aren’t profit maximizers, but they are profit satisficers. They need to show head office or their investors that they’ve achieved a certain return on investment.
If they can achieve that the easy way, by getting government to cut their taxes instead of working harder and investing more, then they can go and relax on the golf-course, or whatever it is they do. This impression is not backed up by any particular theory or economic analysis, but it seems to fit with what we’ve seen.
It is interesting that Michael Porter, the world’s foremost competitiveness guru, has for a long time advocated stronger environmental regulations as a route to increasing competitiveness. These areas, as well as good physical and social infrastructure and an educated and trained workforce, have figured more prominently in the World Economic Forum’s competitiveness index.
Corporate tax cuts seem to work more like a drug that our corporate executives are getting more and more dependent on. But unfortunately, it’s not a viagra-type stimulus drug. They seem to need increasing doses of it every year just to get out of bed and function in a barely satisfactory way.
The problem is this drug is costing the rest of us enormous amounts of public revenue, which we’re going to pay for again through cuts to public services.
It’s also leading to corporate execs who would rather go to the financial casino and gamble to make quick bucks instead of doing more productive work. And when they gamble and lose, they run back to mommy the nanny state for a bail-out, as Jim has pointed out.
Instead of closing the INSITE needle-exchange for street addicts in Vancouver, Harper and Flaherty should force the CEOs to go cold turkey. The federal and provincial governments should close down this increasingly expensive publicly-subsidized corporate tax cut drug program for corporate executives, and put the funds saved into productive public investments instead. We’d all be better off.