Doug Saunders, of the Globe and Mail, has gamely launched a real and meaningful discussion about corporate tax cuts on these pages. See the comments section of this post.
Since that forum was getting unwieldly, I’m starting a new post.
Doug’s stated pursuit (and mine, and I wager most readers’) – how to harness growth to maximize social welfare – does require of us all to prove our point, with theory and evidence.
Here I try to address his request for evidence to support the position I took on the Legend of Zero post, and make a brief comment about the relationship between growth and the distribution of the gains from growth.
Doug’s comment about retained earnings, and why they should not be taxed, will have to wait for another post.
Stephen Gordon has prepared a great quick guide to the literature about corporate income taxes, providing themes such as efficiency, incidence and Canadian content.
As per all things economics, much evidence abounds on both sides of the debate, and Stephen has graciously noted he would be happy to add to his list of articles, which mostly support the idea of cutting corporate taxes. My colleagues and I should perhaps collate some articles to add to his list. Here’s my fly-by contribution.
The most hotly debated topics are the effects of corporate tax cuts on investments and jobs. Those two elements do not exhaust the term “social welfare”, but I’ll treat them first.
Here’s two readings that suggest the impact of reducing corporate income taxes, while it may effect behavior at the margins, does not have a positive effect at the macro level of the economy on the stock of capital or the investment rate.
One is a 2002 working paper from the Bank of Canada, “Entrepreneurial Risk, Credit Constraints and the Corporate Income Tax: A Quantitative Exploration”. It shows “the removal of the corporate income tax decreases capital formation”.
One, an econometric examination prepared for Congress in 2007, states “ …many of the concerns expressed about the corporate tax are not supported by empirical data. Claims that behavioral responses could cause revenues to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis.”
(Stephen Gordon’s list has an earlier paper by Jane Gravelle, a co-author of this excellent piece)
The claim is that reducing corporate taxes, or any tax if you are a Harper Conservative, creates jobs.
A huge number of jobs were indeed created while taxes were most actively cut: between 1997 and 2007 Canada created more jobs than any nation in the G7 and cut taxes most aggressively of any nation in the G7. Were tax cuts the reason for the job creation? Other things were going on at the time too. Things like, say, the ascendance of emerging economies and the global supply chain, and Canada’s place in it.
Jim Stanford has recently written a sharp analysis showing the negligible jobs effect of lower corporate income tax. Jack Mintz – the most frequently cited economist on the pro-cuts side — disagrees, and suggests 100,000 jobs and $30 billion in capital stock could be created “in the long run” by lowering the CIT rate.
Fred Lazar — prof at the Schulich School of Business, who says flat out he does not think corporate income taxes serve any economic purpose — thinks Jim has delivered the knockout punch in the Stanford vs. Mintz championship match about the effect of reductions on jobs and investment.
Today’s Globe and Mail tackles the subject with a piece entitled “Cut taxes, create jobs? Not quite” (which, en passant, references a Department of Finance study that ranks the importance of corporate tax cuts in a list of stimulative measures at dead last).
Again, tax rates matter, at the margin. But the margin is, um, marginal. Many other decisions influence business investments, foremost whether there is growing or declining demand for their product or service.
What’s Missing From The Jobs/Investment Analysis: Social Welfare Writ Large
Social welfare doesn’t just get maximized through investments and jobs. Social welfare is also shaped by the social and public side of the economy, not just the business side.
The proponents of corporate tax cuts regularly commit the fallacy of decomposition: they don’t talk about what taxes buy.
One of the most evocative recent studies is Hugh Mackenzie and Richard Shillington’s Canada’s Quiet Bargain. They found 80 percent of Canadians get more value in public services than they pay in taxes. At the halfway mark of the income distribution, the value of public services adds another 50% to a household’s disposable income. That means public services stretch our paycheques, offsetting market prices for healthcare, education, transit, water, electricity….the list goes on. For the majority of Canadians, public services put more money into our pockets than tax cuts. (And they make us healthier, smarter, and more connected.)
That’s at the household level. There is also the business case for what taxes buy. The platform for growth requires a strong public infrastructure in which to do business; stable societies; the rule of law; a ready workforce; etc. The twin engines of the economy are public and private enterprise. Growth is powered by both.
Keep chipping away at sources of public revenue and you erode your capacity to maintain built infrastructure or attend to emerging needs, for businesses and households alike. The result? Growth slows.
THE GROWTH QUESTION
The stated goal of tax cuts is to boost economic growth. The implication is that social welfare is improved by growth, presumably through broad-based distribution of prosperity.
In Canada, U.S., and the U.K., that has not been the case in the decade or two preceding the global economic crisis. While inequality has not galloped ahead everywhere, it certainly has in these nations.
Thomas Picketty and Emmanuel Saez were the first to flag who benefits most from growth, turning the Kuznets’ theory – that growth reduces inequality – on its head. Saez and Michael Veall (from McMaster University) compared the U.S. and Canada and showed similar results.
The top 1% of Canadian taxfilers received a third of the total growth in income in the period 1997 to 2007. In the 1960s, a similar period of sustained and robust growth, they took only 8%. In the U.S., recent gains from growth are even more maldistributed.
If, say, only one in ten people get most of the income gains from growth, what’s in the bargain for the nine others? Particularly if they get less service out of the deal too.
My parents’ generation built the platform for growth in Canada half a century ago. Our economy is five to six times bigger today and we can’t find the money for repairing what our parents built. What’s up with that?
Simply put, the tax cut agenda. It strips public resources and erodes our capacity to meet today’s needs or prepare for the future.
Growth may be good. (Actually, that’s another topic for debate; but its absence certainly makes things difficult.) But growth is not enough.
How is growth shared? How is it used to seed future growth and prosperity? That’s the challenge for my generation of adults. We’ll need to come up with something better than just tax cuts.
- Don’t Privatize ISC (May 16th, 2013)
- Provincial Corporate Taxes: A 12% Floor? (April 23rd, 2013)
- Fairness by design: a framework for tax reform in Canada (February 14th, 2013)
- Effective Corporate Tax Rate Falling (October 18th, 2012)
- Do Corporate Tax Cuts Really Pay For Themselves? (September 13th, 2012)