Picking Winners (Who Are Already Winners)

The CCPA just published a mini-study by yours truly on how the coming federal corporate income tax cuts will exacerbate regional inequalites in Canada.

Here’s the link for the full study:

http://www.policyalternatives.ca/Reports/2008/05/PickingWinners/index.cfm?pa=BB736455

Finance Minister Jim Flaherty and his colleagues like to pretend they are “neutral” in their economic policy-making.  That is, they don’t “pick winners.”  They just create an efficient, laissez faire level playing field, and then let the magic of the free market decide who will be the “winners.”

But of course every policy change has differential impacts on different segments of the economy.  Corporate tax cuts are no different.  In fact, the impact of corporate tax cuts tends to be especially concentrated in particular regions (and sectors) of the national economy.  This reflects the incredible concentration of corporate profits in the resource and finance sectors of the economy, which in turn reflects the deep structural remaking of our national economy (driven by the resource boom, deindustrialization, and financialization).

So make no mistake: Jim Flaherty is picking winners with his corporate tax cuts.  The only difference from standard winner-picking practice is that the “winners” he is favouring with his policies are already doing fabulously well without his extra support.  Here’s how…

Profit margins in the petroleum and finance sectors are around 20% of sales (using 2006 data, the most recent annual data available).  Profit margins in the rest of the Canadian economy average about 6% of sales.

On a per-employee basis, the petroleum industry generates a stunning $300,000 worth of profits per worker per year.  (If that little factoid isn’t enough to turn everyone into a Marxist, I don’t know what will!)  The financial sector, in contrast, produces a mere $100,000 in profit per employee per year.  The mundane rest of the economy generates an average of only $10,000 per employee — barely enough to qualify as “exploitation”.

The concentration of corporate profits in particular sectors should naturally imply a similar concentration of savings from corporate income tax reductions in those same sectors.  And regions which enjoy a disproportionate presence of those high-profit sectors will similarly capture a disproportionate share of the tax cuts.

A couple of big caveats are in order here.  First, how much tax a company pays does not solely depend on how much profit it makes.  Differences in deductability of expenses, carried-forward losses, and other accounting issues can create big differences in effective tax rates (as opposed to statutory tax rates, which are common across sectors).  In am indebted to my friend and very careful reader Erin Weir (economist at the Steelworkers) for stressing this point.  (By the way, stay tuned sometime in the near future for a blockbuster study from Erin on the whole big picture of corporate taxes — it’ll be essential reading for all of us on the left fighting this insidious trend.  Get it out there soon Erin!)

And secondly, it’s a bit of a stretch to speak of a “region” capturing benefits from corporate tax cuts.  It’s corporations capturing those benefits, not regions.  Whether anything happens as a result of those tax cuts to the region which the corporation happens to inhabit, depends on what the company does with its resulting savings.  If it reinvests them, then there may be some “trickle-down” benefit.  In practice this has not happened: real business capital investment has declined as a share of after-tax cash flow, even as the incentive for reinvestment has been doubly reinforced (by both record pre-tax profits and falling tax rates).  Even if corporations spent their largesse on gold-plated bathroom fixtures and other self-dealing luxury consumption, you could at least argue there is some stimulative impact.  But if companies just sock away the extra cash flow resulting from lower taxes (paying off debt, accumulating cash hoards, or speculating on financial assets), there’s no benefit to the company’s home region whatsoever.  In this light, the fact that corporate tax cuts are occurring at the very moment when non-financial corporations (for the first time in postwar history) have become significant net lenders to the rest of the economy, can’t be ignored.  Companies as a whole already literally have more money than they know what to do with; why on earth would we give them any more?

The disconnect between a corporation and its home “region” is greatest for Newfoundland, which comes off looking like a “winner” in my study (more on this below).  As a share of GDP, profits are higher in Newfoundland (an incredible 32%) than any other province.  An awfully large chunk of that money never sets foot in Newfoundland: it represents profits from offshore oil production (most of which also never touches ground in Newfoundland) collected and repatriated back to the head offices of the companies producing that oil (some of which are HQ’d in Alberta, some of which are located abroad).  This largely explains the odd disconnect between Newfoundland’s high GDP-per-capita (which is higher than the Canadian average) and its low personal incomes (which are well below the national average).  Thus we should obviously and emphatically discount the notion that Newfoundlanders will benefit from corporate tax cuts, just because a large portion of the corporate profits that will be priveleged by those cuts originated with economic activity that occurs within Newfoundland.

OK, enough for the preliminaries, let’s get to the beef.  The three “have-oil” provinces (which are also now, both on GDP-per-capita grounds and for purposes of the federal equalization program, the only “have” provinces left in the land) account for 35% of all corporate profits, based on just 15% of Canada’s population.  On a per capita basis, therefore (and on the somewhat iffy assumption again that the incidence of corporate tax savings will be broadly proportional to corporate profits, caveat 1 again), those three provinces will “receive” (caveat 2 again) three times as much as the rest of the country.  By directing such a focused share of its total impact toward the three provicnes whose economies are already performing much better than the rest of Canada, the CIT cuts will clearly exacerbate the already-growing regional inequality so evident now in Canada.

(Here’s another related shocker: in 2006, Alberta’s GDP per capita was two-thirds higher than the rest of Canada.  This year, with $125 per barrel oil, it could quite conceivably be nearly twice as high as the rest of Canada.  What was once a substantial but crossable gap between Alberta and other provinces, has become — thanks to the global commodities boom and our hands-off energy policy — an enormous chasm.)

Equalization?  Did somebody mention equalization?  There was a great national kerfuffle two weeks ago over the revelation (which I actually announced in a Globe and Mail column back on October 23 2006 — but, whatever, I don’t believe in intellectual property anyway) that Ontario is now a have-not province, and Saskatchewan and Newfoundland are the other have’s.  The federal equalization program costs something less than $15 billion per year (I’m not sure exactly how much less — the number is buried in a slightly broader budget category called “fiscal arrangements”).  This portion of Ottawa’s general revenues is delivered back to the 7 have-no-oil provinces.  Ontario will soon begin collecting small revenues from that program (although it will still be a net contributor, considering its share of the $15 billion in federal taxes that are devoted to funding it).

But it turns out that the CIT cuts (which will also cost $15 billion per year by the time they are fully implemented) is another equalization program — sort of.  It’s actually called “equalization in reverse.”  Through those lopsided tax cuts, Ottawa will give $15 billion in revenue back to the corporations of the land, a vastly disproportionate share of which is due to economic activity in the 3 rich provinces.

So one $15 billion program is sharing money with the poorer regions of the land.  And another $15 billion program is concentrating it right back in the richer regions of the land.

Only in Stephen Harper’s Canada, you say?  Pity.

One comment

  • Tine Steen-Dekker

    Dear Sir, Thank you for your work; I am shocked at what you are finding, but not suprised. History has taught me that, on the whole, the rich people are somehow, mostly always, able to hang on to their lifestyle and financial position. The general position of the have-nots has steadily been: respect for the abilities of the wealthy.If I could even make a small change in this situation, I would. I do speak out, and write polite letters in which I state what I think. Thank you again, TSD.

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