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The Progressive Economics Forum

Simpson Walks the Party Line on Corporate Taxes

Yesterday’s Jeffrey Simpson column was entitled, “Walking the Line on Corporate Tax Cuts.” Incredibly, he walks the narrow 1.5% line between the Liberal and NDP proposals.

To his credit, Simpson takes an open-minded look at the evidence, which indicates “no discernible links” from corporate taxes to employment or investment. On this basis, he accepts the Liberal proposal to raise revenue by restoring the 2010 federal corporate tax rate of 18%.

He mysteriously goes on to conclude that the NDP proposal to restore the 2008 rate of 19.5% “is a move in the wrong direction.” He offers no theory of why 18% is reasonable but 19.5% “is unwise.”

To put these figures in perspective, the federal corporate tax rate (including surtax) was 22.1% in 2007, before the Conservative cuts began. It was 29.1% in 2000, before the Liberals started slashing.

If one accepts the excellent analysis in the first three-quarters of Simpson’s column, then the NDP proposal is somewhat better (not to mention more trustworthy) than the Liberal proposal.

However, having Simpson and the Liberals on board for even a modest corporate tax increase is definitely a move in the right direction.

UPDATE (April 18): I have the following letter in today’s Globe and Mail.

In Walking the Line on Corporate Tax Cuts (April 15), Jeffrey Simpson correctly explained that differences in corporate tax rates have no discernible effect on employment or investment. After arguing that the Liberals’ proposed federal corporate tax rate of 18 per cent is reasonable, he concludes that the NDP proposal of 19.5 per cent “is a move in the wrong direction.”

To put both cautious increases in perspective, this rate was 22 per cent as recently as 2007 and 29 per cent until 2000 (including the corporate surtax). The NDP would go modestly further than the Liberals in what Mr. Simpson’s own evidence indicates is the right direction.

Erin Weir, senior economist, International Trade Union Confederation, Brussels

Enjoy and share:

Comments

Comment from Donald Hughes
Time: April 16, 2011, 7:53 am

“He offers no theory of why 18% is reasonable but 19.5% ‘is unwise.'”

So, then, what’s your optimal tax rate and mix?

If there is no discernible link between corporate tax and investment, why not a 95% rate?

Comment from Erin Weir
Time: April 16, 2011, 2:55 pm

The conclusion that corporate tax rates have no discernible effect on investment is based on the range of rates that countries have actually implemented.

Of course, there is good reason to believe that a 95% corporate tax rate would curb investment.

I do not claim to have precisely identified the point at which a higher rate would appreciably affect investment. However, that point does not lie between the Liberal and NDP proposals.

Comment from Donald Hughes
Time: April 16, 2011, 9:26 pm

The issue would seem to be what the optimal mix is, though. Saying that it wouldn’t hurt that much to raise to a 33.5% combined rate as a Layton-Horwath team would probably do is pretty obviously correct to me, but that doesn’t seem like the real issue. I mean, for a party that still calls itself socialist, saying that there should be a massive tax cut for corporations relative to only a decade ago seems like a political dead end – unless there is some evidence (which there is) that corporate tax isn’t the best tax to raise revenue from.

Comment from Nathan Rao
Time: April 18, 2011, 7:12 am

Barrie McKenna says the following in his Globe piece this morning:

“Across OECD countries, government revenue from corporate income tax as a share of gross domestic product is higher now than in the late 1990s. And taxes of all kinds (corporate, individual and value-added) are bringing in more revenue as a share of the economy now versus a decade ago.”

This doesn’t sound right to me. Could someone provide (or point me to) a good response? Similarly, it would be interesting to see a good rebuttal of the awful piece by Doug Saunders in the Saturday Globe.

Thanks.

Comment from Nathan Rao
Time: April 18, 2011, 8:07 am

Oops, sorry, Armine Yalnizyan has already responded to the Saunders column here:

http://www.progressive-economics.ca/2011/04/16/the-legend-of-zero/

Comment from Erin Weir
Time: April 18, 2011, 9:13 am

Corporate tax revenues are higher relative to GDP because pre-tax corporate profits are much higher relative to GDP. However, corporate taxes now collect a smaller share of profits.

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