Correcting Neil Reynolds

Last weekend, I pointed out that Neil Reynolds had misleadingly presented figures on capital-gains realizations as being capital-gains tax revenues. Tuesday’s Report on Business included the following item:

Correction – January 4, 2011

U.S. capital gains tax realizations fell to 3 per cent of gross domestic product in 1987, when the rate was hiked. Incorrect information appeared in a Dec. 29 column.

I appreciate the acknowledgement that incorrect information appeared in Reynolds’ column. But the first sentence is pretty backhanded.

Instead of clearly stating the error (confusing realizations with revenues), it just restates the column’s assertion that capital gains decreased in 1987 due to a tax change rather than due to that year’s stock-market crash. Some correction!

Reynolds’ latest column is yet another attempt to claim that tax cuts magically increase tax revenue. Correcting him could be a full-time vocation.

The Jurist has already done an excellent job of exposing the flawed logic. But the numeric presentation is also flawed. In particular, there are at least three problems with this paragraph:

Mr. Flaherty’s corporate tax cuts are already paying off – for the government. In its most recent fiscal update, the Finance Department reported in October that corporate tax revenues had increased, year over year, by 3 per cent – notwithstanding lower corporate earnings and Mr. Flaherty’s incremental corporate tax cut a year ago. With receipts at $30.3-billion, corporate tax revenues were running 8 per cent ahead of the government’s expectations.

1. The fiscal update actually reported corporate tax revenue of $30.4 billion.

2. This amount was for the 2009-2010 fiscal year: April 1, 2009 – March 31, 2010. So, “Mr. Flaherty’s incremental corporate tax cut a year ago [January 1, 2010]” only covered the final quarter. For most of that fiscal year, the federal corporate tax rate was still 19%, appreciably higher than the rates trumpeted by Reynolds.

3. The fiscal update explicitly stated, “Most of the higher-than-expected corporate income tax revenues do not carry forward over the outer years of the forecast period, as they were due to exceptional one-time factors.” It is interesting that corporate tax revenues exceeded expectations in 2009-2010 and it would be interesting to know what the exceptional factors were. But a one-year blip in revenue hardly proves that ongoing corporate tax cuts pay for themselves.

7 comments

  • Thanks for this. As soon as I read the column on the corporate tax, I was curious what this blog’s contributors would have to say about it. But you didn’t address what I felt was the most dramatic of Reynolds’s statements:

    “In 2002, with much higher rates, corporate revenues reached $24.2-billion; in 2003, $22.2-billion; in 2004, $27.4-billion; in 2005, 29.9-billion. More importantly, corporate tax revenues are carrying as much of the country’s tax burden as they did when rates were higher: Corporate tax revenues in the past decade averaged 12.6 per cent of the government’s income; in 2010, it provided 13.9 per cent.”

    If these numbers are accurate, they seem to paint a pretty clear picture: reduced corporate taxes are producing at least mildly increasing revenues. But I agree with you that this kind of thing seems “magical,” so I’m still skeptical. Anything you’d care to add?

    Peter Severinson
    Assistant editor, BCBusiness

  • The Department of Finance does not argue that corporate tax cuts are self-financing. eg. the 2008 Budget (p202) stated that “corporate income taxes are projected to be dampened by tax relief measures.” Table 5.4 (pre recession) showed a projected decline in CIT revenues from 2.8% of GDP in 2007-08 to 2.2% in 2009-10

  • The post by Paul Krugman today entitled Texas Omen does a pretty good job of de-bunking the low taxes, non-unionized public sector, equals strong fiscal position type of argument.
    Evidence based public policy debate is always preferable. Its just that evidence needs context in order to be meaningful. Arguing from the point of view of business investment that tax cuts make things better does not satisfy the broader criteria for evidence based analysis. What do corporate tax cuts do for employment when compared to new public investment, for instance, or income re-distribution.

  • As a response to Peter’s question, I would say that the main part missing in the analysis is the growth in profits as a share in revenue. The labour share of income has been falling in Canada while the profit share has been on the rise. Consequently, if corporations are getting more of the total income, it stands to reason that even with lower rates, they could carry more of the burden.

    Moreover, there is a race to the bottom between personal and corporate tax rates. It is thus also possible that for the time being, effective personal tax rates, especially at the top of the scale, has over-taken corporate tax rates.

    Finally, in terms of the more general laffer curve-type argument the income elasticities required for it to make sense suggest that the turning point is way above current rates, or any rates from the recent past. Other processes are likely to be at work.

    And anyway, what’s the channel? For example, firms could be enticed by lower rates to invest more… But historically, this link has been virtually absent for a variety of reasons, notably because unlike what most economists argue, relatively few people think at the margin… More to the point, firms invest when the economy is dynamic or when there is something that can only be done in a given place, e.g. exploiting the ar sands. Giving them money back via tax cuts offers no specific garantees that the money will be reinvested locally…

    This reminds me of what remains one of my favourite articles by Jim Stanford to date, Protesting Too Much, where he debunks the idea that there’d be a strong link between tax rates and investment at our levels of taxation.

  • Here is critical commentary on Reynolds from two frmer senior Department of Finance officials who reject the argument that CIT rate cuts pay for themselves

    http://www.3dpolicy.ca/content/proof-not-numbers-flaherty-s-corporate-tax-cuts

  • It’s hard to take the Globe and Mail seriously as a newspaper as long as Reynolds continues to be employed by them.

    One wonders if he has some dirt on management or they just don’t appreciate the damage his continued presence does to their overall credibility.

  • Peter, I just wrote a more detailed post on corporate tax revenues. If you look at my table covering the whole decade, it is clear that Reynolds just cherry-picked those fiscal years that had lower revenues than 2009-10.

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