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The Progressive Economics Forum

Mintz Misleads on Corporate Taxes

Jack Mintz is out today with yet another paper applauding the federal corporate tax cut from 18% in 2010 to 15% in 2012.

Revenue Fudge

He claims that the revenue loss will be “relatively small” or “relatively insignificant” without actually suggesting a dollar amount (pages 3 and 20). By comparison, the Department of Finance (see Table 3.5), the opposition parties, and even the Canadian Manufacturers and Exporters estimate that this cut will reduce annual corporate tax revenues by $6 billion.

The “relatively small” claim has a footnote citing the 2007 Tax Competitiveness Report, also authored by Mintz. That report referenced “the tax-revenue-maximizing rate of 28 percent” (pages 0, 14 and 22).

The proposal Mintz now finds so odious is to roll back the federal rate to 18%. With a 10% provincial rate, that would mean a combined rate of 28%!

So, today’s report alleges that there is “little, if any, revenue cost” (page 20) to cutting well below what Mintz himself identified as the “tax-revenue-maximizing rate.” (Finance Canada and I think the revenue-maximizing rate is far above 28%.)

False Premise

Mintz’s premise is that Canada’s corporate taxes are “relatively high . . . the 2010 federal-provincial rate of 29.3% was almost four points higher than the OECD average” (page 20).

He means an unweighted average dragged down by small countries with ultra-low tax rates like Estonia, Ireland, Iceland, Chile, the Czech and Slovak Republics, Hungary, and Slovenia – hardly Canada’s foremost economic competitors. With countries appropriately weighted by economic size (GDP), Canada was already below the OECD average in 2010.

UPDATE (January 25): Quoted by Canadian Press

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Comments

Comment from Travis Fast
Time: January 25, 2011, 1:12 pm

I just threw up a post on this too. Thanks for the link to the paper I looked everywhere except his home page. Did you also notice that if you take DoF numbers and run them for the same 7 years that Mintz runs his 30 billion for 100,00 jobs claim that it works out to 31.8 billion in lost revenue. And when you break the numbers down further this thing costs 6 billion a year to create 14,300 jobs which is less than 1/10th of 1 percent of total employment at cost of over 400,000 per job! This has to be one of the most expensive job creation schemes in Canadian history.

Comment from Erin Weir
Time: January 25, 2011, 1:43 pm

Thanks. I think that link is hard to spot because it is so much smaller than the links to past papers. Before I saw it, I wondered whether Mintz had taken a page from the CME’s playbook.

Mintz writes, “the last 1.5 percentage point reduction in corporate tax rate would increase Canada’s capital stock by about $30 billion and employment by about 100,000 jobs” (page 3).

Finance Canada’s numbers indicate an annual fiscal cost of $3 billion for a 1.5% cut, which would work out to $30,000 per year per job (if you believe the 100,000.)

Comment from Travis Fast
Time: January 25, 2011, 2:59 pm

OkI see but your number is wrong too. Jack says 30 billion = 100,000 over 7 years in the FP

“On its own, the final cut to corporate income tax rates, from 16.5% to 15%, would result in $30-billion in additional business investment and 102,500 new jobs over a seven-year period, the paper estimates.”

That is 14300 jobs a year. So the private sector needs over 300,000 to create a single job. If it is 3 billion and not 6 then it is 210,000 per job as a government employment program..

Comment from Travis Fast
Time: January 25, 2011, 3:14 pm

7years * 3 billion = 21 billion / 100,000 jobs = 210,000 per job.

Comment from Paul Tulloch
Time: January 25, 2011, 3:21 pm

I say Canada does their own quantitative easing and forget the tax cuts. Commit oneself to a lower dollar over the long term, and leave the cit alone. Why are we all framing this tax cut from 18.5% to 16. Isn’t this part two of Harper’s federal CIT cut from 23 %?

I am so glad that the right wingers are so optimistic about tax cuts. When the economy starts clogging up from lack of investment and the deficit start hanging onto to Harper, he will basically have to cut programs or raise taxes, which Canadians will not put up with- and his slim minority will be gone.

If the opposition ever gets into power, I do wonder what will their growth policy be? Libs or dems have not said much on this. What we need is a counter to what Harper and Flaherty are now personifying as their economic plan- Corporate tax cuts in times of programs cuts will, as I have stated here previously, not constructively interfere with Canadians.

Comment from Erin Weir
Time: January 25, 2011, 6:28 pm

Travis,

My reading of Mintz is that, after seven years, Canada’s capital stock will be $30 billion larger and total employment will be 100,000 higher. Of course, corporate profits – and hence the fiscal cost of a 1.5% cut – will presumably also be higher after seven years. So, my back-of-envelope number is probably too low for that reason.

Your understanding of Mintz seems to be 100,000 person-years of employment spread over seven years (i.e. 14,300 jobs per year). I think that you may be getting hung up on The Financial Post’s wording.

Comment from Travis Fast
Time: January 25, 2011, 8:32 pm

100,000$ person years? Huh? Hung up?

“…would result in $30-billion in additional business investment and 102,500 new jobs over a seven-year period, the paper estimates.”

I passed grade 7 maths with high marks on turning such statements into elementary calculations.

Investment 30 billion / 7years =
100,000 jobs / 7years =
Revenue loss 21 billion / 7years =

I will go look at the paper directly and see what it says.

Comment from Travis Fast
Time: January 25, 2011, 9:03 pm

Here is the wording in the Research Paper:

“we estimate the last 1.5 percentage point
reduction in corporate tax rate would increase Canada’s capital stock by about $30 billion and employment by about 100,000 jobs in the long run (4).

Footnote 4 refers us to:
CANADA’S TAX COMPETITIVENESS AFTER A DECADE OF REFORMS: STILL AN UNFINISHED PLAN
Duanjie Chen & Jack Mintz | May 2010

Inter alia the long term is reiterated without mention of what the means. In the FP article he says it is 7 years.

But what you are saying is that he is really saying the CIT cut will generate 14,300 jobs above trend every year in perpetuity. That is it will add 14,300 jobs to the stalk of employment every year above what it would have been in absence of the cut. That would mean that 3 billion tax cut will generate an increase of around 4.3 billion of new investment every year which will generate 14,300 extra jobs each year. But that doe not change the calculation.

4.3 billion / 14,300 jobs = 300,000 of private investment for every job. On the governments side the 3 billion forgone revenue each year (forget GDP growth) will be around $220,000 per job.

I think you dropped a zero. One of us is wrong and I really do not want it to be me because I have four cord of wood left to split and if I am wrong I will have stare at the zeros all winter. Or for a solid 8 hour day.

Anyway go read my post so I can sleep easier.

Comment from Erin Weir
Time: January 25, 2011, 10:22 pm

Yes, I quoted that wording in my first comment. And “seven years” appears in the footnote immediately below the one you looked at.

14,300 jobs lasting for seven years equals 100,000 person-years of employment.

14,300 jobs lasting for seven years does not equal 100,000 jobs.

Mintz claims that total employment will increase by 100,000 jobs. I interpret this prediction as a one-time change that will take about seven years to happen.

To quote page 20, “after a full adjustment takes place (at least seven years),” employment will permanently be 100,000 higher than otherwise and revenue will permanently be $3 billion lower than otherwise (using Finance Canada’s numbers without profit growth).

That’s $30,000 annually to support each additional job. I did not drop a zero.

Before the adjustment is complete, the cost per job would be larger.

Comment from Travis Fast
Time: January 25, 2011, 11:04 pm

Huh? Could you write out the equations? I really do not get it.

Comment from Travis Fast
Time: January 25, 2011, 11:11 pm

Mintz claims that over 7 years 100,000 jobs will be created. Those are permanent jobs. So that = 14300 jobs per year for seven years. Presumably he is talking about changing the structural level of employment?

Comment from Erin Weir
Time: January 25, 2011, 11:51 pm

Annual revenues go down by $3 billion and 100,000 permanent jobs are created.

After both of those things have happened, we have $30,000 less annual revenue for each new job.

Comment from Travis Fast
Time: January 26, 2011, 6:00 pm

Ok agreed but we are talking about different things. I am talking about start up costs you are talking about operational costs.

Comment from Brian Dell
Time: January 26, 2011, 10:54 pm

So this is how the “progressives” use stats:
declare that the provincial rate is 10% even though both the “weighted average” and simple average is higher… because that serves what is being argued. Then turn around and say that a “weighted average” should be used for determining what the rate is, when that serves what is being argued.

I fail to see where Mintz has been “misleading.” Using an ordinary average is not misleading. Incomplete, perhaps, but “misleading”? I suggest dialing back the insinuations of dishonesty. It is rather misleading to use inconsistent standards as this supposed critique does.

By the way, where is the cite about what Finance Canada believes re dynamic scoring effects? I worked at Finance Canada and object to the way Stanford and the rest of you are implying to the media that Department supports your general view. A cut in the corporate rate was a hobby horse of sorts for Kevin Lynch for years.

Comment from Erin Weir
Time: January 27, 2011, 9:11 am

I did not “declare that the provincial rate is 10%.” Mintz is advocating a 15% federal rate and a 10% provincial rate, for a 25% combined rate. In 2007, he acknowledged that cutting below 28% would reduce revenues. Now that the Liberals want to defer corporate tax cuts because of the revenue loss, he is straining to downplay it.

However, you make a good point that most provinces are not actually cutting to 10%. Weighting the rates each province has legislated by GDP indicates an average of 10.7%, which does not change my critique.

Going back to an 18% federal rate would mean a 28.7% combined rate, pretty close to the peak of Mintz’s Laffer curve. A 15% federal rate would mean a 25.7% combined rate, well below what Mintz claimed was “revenue-maximizing.”

For over a year, Mintz has been manufacturing big job numbers for use as political propaganda in selling business tax cuts. Even if you agree with him about how much investment will increase, the assumptions underlying his job numbers are misleading.

I have also worked at Finance Canada. Jim and the rest of us have never implied that it opposes corporate tax cuts. We have noted its published estimates of how much they will cost and how few jobs they will create.

Comment from Erin Weir
Time: January 27, 2011, 2:32 pm

Travis,

We are indeed talking about different things. The 14,300 figure initially made me wonder whether you were thinking of person-years rather than permanent jobs.

Since both the tax cuts and the promised employment increase are permanent, I thought it made sense to consider ongoing costs per job. However, the revenue loss starts years before we get up to 100,000 new jobs. I guess your numbers are a way of making that point.

But the whole $21 billion would be start-up costs only if all 100,000 jobs magically appear at the very end of seven years. If 14,300 jobs are created each year, then half of that money would be operational costs and the other half would be start-up costs.

After all 100,000 jobs are created, annual operating costs are $3 billion. If 57,200 jobs are created by year four, then operating costs would be $1.7 billion that year. This money would have to come out of the $21 billion.

So, I understand how you did your calculations, but not what they mean.

Comment from Mel Barns
Time: March 16, 2011, 7:16 am

What an amazing discussion! I enter this complex field with a simple complaint: I do not agree with the corporate tax cut because there is aa accompanying increase in the personal tax on dividend income. The individual should not be shouldered with helping to mitigate the cuts. I shiver to think about the tax impact on dividends if this foolishness about zero corporate taxes catches on?
I further see no reason why corporations shouldn’t willingly contribute to government finances that help set fiscal and corporate laws and enforce them.
Finally, if zero corporate tax helps the economy, surely zero individual tax would as well, because of the aid it would give to consumption and saving, both of which are components of the GDP.

Comment from Patrick Louch
Time: March 21, 2011, 1:33 pm

Mel,

If there were zero corporate taxes, dividends would increase. This is because dividends are payments to shareholders from corporate profits. Less taxes= more profits = more dividends.

You are right that the elimination of the dividend tax credit would increase the amount of tax you pay on dividends, but in general all shareholders (preferred shareholders aside, there would need to be a temporary exemption for them) would be made much better off if all corporate taxes were eliminated (even if the tax credit went away too) because they would receive more dividends and capital gains.

The only reason we have the tax credit in the first place is to offset the corporate income tax. Without it you would pay tax twice: a corporation earns a dollar, pays 28 cents in tax, the remaining 72 cents goes to the shareholder in a dividend who pays 36 cents tax on that (50%) and is left with 36 cents. So on the $1 of profit, 64 cents was taxed on its way to the shareholder. A corporate tax is the same thing as a tax on the shareholder, except (I would argue) more damaging to the economy.

Willingness has nothing to do with it. Corporations are set up to make money for their shareholders and they are good at it. The best businesses in the world arose as corporate structures came into being. If you tax them too much they will a) move, b) expand less, c) fail, or and/or d) do perverse things like take on too much debt or engage in shifty transfer pricing.

Zero individual tax would be good for the economy, but would not raise enough revenue to cover bare-bones gov’t services (law and order and stuff).

I know this post is everywhere at once, but I wanted to cover all the bases very briefly.

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