Drummond on Corporate Taxes and Investment

For years, Don Drummond of TD Bank has publicly observed that business investment in Canada is lagging far behind soaring profits and called for further corporate-tax cuts to spur investment. He never seemed to perceive a contradiction between the fact that corporations are not reinvesting their record-high after-tax profits and the claim that even higher after-tax profits would boost investment.

In a fascinating commentary released yesterday, he acknowledges that due to recent tax cuts, “the current comparable rates suggest that the corporate tax system can’t be blamed for Canada’s investment shortfall, compared to the United States.” Paul Vieira’s initial report for CanWest (discussed by another progressive blogger) included this quote. Interestingly, the version printed in today’s Financial Post does not.

Drummond also notes that “Canada’s high corporate taxes appears to have had little effect on the corporate sector’s after-tax profitability.” Of course, this is because Canada’s corporate taxes are “high” only if measured as marginal effective tax rates. In statutory terms and in relation to total pre-tax profits, Canada’s corporate taxes are not particularly high.

In fact, Drummond indicates that after-tax profits may be too high: “M&E [machinery and equipment] investment as a share of profits was at an all-time low in 2006, suggesting that high levels of profits has deterred firms from pushing for productivity growth because the bottom line is already well padded.”

After making these points, he disappointingly devotes two-thirds of his final “Lessons for Canada” section to advocating more corporate-tax cuts: “There is a lot more that can be done, particularly in reducing corporate tax rates, eliminating the remaining provincial capital taxes and harmonizing all provincial sales taxes with the federal GST.”

However, the notion that Canadian managers “have become more complacent due to record high profits” suggests that lower corporate taxes and correspondingly higher after-tax profits would aggravate the lack of investment. If Drummond believes his own assessment, he should be calling for higher corporate taxes.

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