Five Economic Reasons To Say No To More Corporate Tax Cuts

This was posted on the Globe and Mail’s online feature Economy Lab today. My sincere thanks to all the people who have posted on the topic on this site.

The Harper government ’s commitment to further reduce the general corporate income tax rate while the nation struggles with budgetary deficits has been championed by – surprise! – the corporate sector. But the majority of Canadians — including business owners and those who work for them — say no to these cuts now.

Here are five economic reasons not to keep reducing the federal corporate tax rate this year or next.

Least Effective Job Creation Measure: According to the nation’s official number crunchers, if you want policy to encourage job creation, cutting corporate taxes is the weakest option (20 cents growth from every dollar of tax cut). Spending on infrastructure has the most impact ($1.50 on every dollar spent). Finance shows spending on income supports for the unemployed and low income Canadians has an equally big pop, and housing initiatives are almost as good ($1.40 for every dollar spent).

Little Impact on Investments: Federal corporate tax rates have fallen from 28% in 2000 to 18% in 2010. Business investment (in non-residential structures and equipment) as a share of GDP was 12.4% in 2000. It was also 12.4% in 2009, and on track for the same in 2010. In the 1960s, the heyday of industrial expansion and economic development in Canada, the federal corporate tax rate was 40%. Statistics Canada’s data on business investment starts in 1981. That year the federal corporate tax rate was 36%, and business investment represented 11.5% of the economy. By 1990 the federal corporate tax had fallen to 28%. Business investment had fallen to 10.8% of the economy. There are many things that drive business investment practices, and while taxes are a consideration they are not the primary factor in investment decisions. The historic evidence shows a commitment to this strategy is a costly faith-based proposition.

Pay More Tax to Cut Taxes: Since Fall 2010 the Harper team has been saying corporate tax cuts “pay for themselves” in closed-door meetings like these. But Budget 2009 figures show reducing the general corporate tax rate from 22.12% in 2007 to 18% by January 2010 removed $6.7 billion annually from public coffers, right through the worse of the recession. Cutting the rate further this year, to 16.5% meant another $2.8 billion in foregone revenues annually. The Harper team’s commitment to reducing the corporate tax rate to 15% ultimately reduces the size of the public purse by $13.7 billion annually by 2012, according to Finance estimates, at which time the federal budgetary deficit will be between $21 and $26 billion (the range of Finance, PBO and IMF estimates). Financing this tax cut requires borrowing more money. The average Canadian taxpayer will pay interest on the borrowed money to provide a tax break for profitable corporations.

False Economies: The Harper government viewed infrastructure spending as an extraordinary one-time stimulus measure. The Federation of Canadian Municipalities estimates a $123 billion deficit in backlogged repairs and maintenance to core municipal infrastructure. This includes roads, bridges, water and waste systems, transit and municipal buildings – but not social housing, schools or hospitals. FCM estimates another $115 billion for new builds to meet new demands. Corporations may be getting a break, but they aren’t responsible for public infrastructure. Governments are. We are. It is a false economy to stick the next generation with an unnecessarily high price tag for what should be happening now – rebuilding the foundation for business, family and community needs everywhere, while the cost of borrowing is at historic lows and unemployment is still high.

The Question of Working Capital: Finance Minister Flaherty says Canada’s tax rates on new business investment are the lowest in the G7. Erin Weir’s blistering riposte to Jack Mintz shows our corporate tax rates among the lowest in the developed world. Who are we competing with? It’s time for a reality check: Canada’s corporate sector is sitting on a growing pile of capital. In the recessions of the 1980s and 1990s the business sector was a net borrower of cash to cover their costs, as one might expect during lean times. In contrast, during this recession the business sector just kept generating bigger and bigger surpluses. In 2007 the net surplus of the sector was $43 billion. By 2008 it was 57 billion and by 2009 $59 billion. By third quarter 2010 $51 billion was generated in surplus. That’s the surplus in the annual flow. The accumulated stock of ready cash (currency, deposits and short term paper) in the non-financial corporate sector had grown to $489 billion by third quarter 2010. That’s a lot of money. When it finally gets put to work, we are likely to witness a wave of corporate consolidation. But mergers and acquisitions don’t necessarily create jobs in Canada.

An across-the-board general corporate income tax rate cut rewards companies whether they create jobs or kill them. The primary sector of the Canadian economy is increasingly in the hands of off-shore investors, who take the profits and jobs elsewhere. That’s global capitalism, but we don’t need to reward it. We can target and reward the firms that put their capital to work in Canada, creating jobs and value-added enterprises.

17 comments

  • Here’s the bumper sticker: Corporate taxes – putting capital back to work!

  • Thank-you for the light on what is, for me, an obscure phenomenon. ‘Greatest common good’ doesn’t appear to come into it – except in the spin during election campaigns.

  • This is a fine contribution Armine.
    If the corporate sector is in surplus, the non-corporate sector must be in deficit. So borrowing from the rest-of-the-world, or by the household sector, or by government, balances the corporate surplus, and, in fact funds the corporate tax breaks and the reduction in the corporate income tax rate.
    In other words who are the job creators? Household consumers, plus government (consumption plus investment) mainly.
    Despite this people like Tom Kent have argued for the elimination of the corporate income tax.
    I like capital taxes myself. Tax corporations on outstanding shares, debt capital, including bank loans, plus retained income.
    Corporations hate capital levies. Go to the sounds of the loudest screams.

  • But since the CIT cuts, productivity has been on a stellar trend rate of growth! Oh shit that is not true. But it will be true when we are all dead because the theory says so:),.

    Never has the private sector in Canada failed to deliver so well and been rewarded so handsomely. Makes me wish I were Egyptian.

  • This is a great look at just a few of the reasons why big cuts don’t make sense. Do we really want to emulate Ireland and their financial (and political) difficulties?

    One important aspect that I would suggest: the impact of corporate tax cuts on small businesses. From personal experience, I know that cuts are meaningless because I utimately need to apply most of the revenue as personal income.

    There are roughly 2.5 million small businessses in Canada, with nearly 60% of those empoying 1-4 voters. That’s an enormous arrray of economic – and political – potential that our leaders seem to be ignoring in favour of ‘big business’.

    Recently, I’ve found myself saying ‘I’d rather see 1,000 businesses employ 1 person rather than see 1 person/business employ 1,000 people.’ Assuming this makes sense, why are we not hearing the same thing from our politicians?

  • Tax cuts =Corporate welfare and get this
    Few years back Mike Harris was popular putting down welfare for people ! yet here we have Harper saying corporate welfare is ok , What gives ?

  • Bill, the Harper government do everything with small business, and specifically its political arm, the CFIB, in mind. Their main strategy is based on using corporate tax cuts to wedge the Liberals (and NDP) as anti-business (against job creators, against investment). Harper does a press conference talking about red tape,guess what, the CFIB has already declared January to be against red tape month. CFIB doesn’t want CPP/QPP benefits to go up? The Cons kill the CLC proposal.

  • Bill, you’re not hearing anything meaningful about small business from our politicians because small businesses don’t own big media, and small businesses can’t give concentrated bribes. Politicians don’t want to retire from politics to become a worker in a small business, they want to retire from politics to be on various corporate boards of directors, each of which pay tens of thousands to attend like one meeting a year.

  • @PLG,

    Though it strikes me that small business people are part of a petite grande bourgeoisie coalition that is the two major parties. Their associations fight many of the same wars together.

  • something I think people have not considered enough about the responsibility of doing business in a high value/ productivity economy.

    The rules and equations of production have fundamentally changed within the dynamics of our transforming high wage- high value adding economy. The costs of social and economic infrastructure to support such an economy has risen dramatically. Not just roads, schools, hospitals and energy – the hallmarks of a mass production infrastructure era some 40 years ago.

    THe new economy requires, advanced communication infrastructure, very expensive publicly financed R&D that eventually is hived off into the private sector, a worker training culture that starts early and is life long which focuses on the tech and knowledge intensive schooling and advanced training delivery, and many more. The list expands and with it each item has an increased cost for the public. To have a Canadian government think they can lead us along the dynamics of such a pathway with a corporate tax rate reduction from 23% down to 15%, is fantasy. The cost of developing a society and an economy for such trans-formative success, has to be born fairly by all participants. Letting the corporations, who profit from such infrastructure cost increases while reducing their social contributions is just the wrong way to head into the future.

    (and who knows afterwards how low it goes, as now the US is contemplating the corporate tax race to the bottom).

    Another point- is the financialization forces of the economy leaving the productive economy so far behind that the only way to produce a profitable environment is on the backs of public infrastructure. It is basically a lowering in the standard of living, to pad profit margins within the productive investment. Has it really become this desperate that the social compromise, i,e, taxes being shared amongst all participants, hos to shrink to this level. Historically the cost of infrastructure versus the corporate contribution to paying for this infrastructure has shrunk to new lows. Harper will not be happy until we can compete with an export processing zone.

    And with this comes the lost opportunities of such revenue.

    Regardless of whether lower taxes attract investment, there is an ongoing cost to provide the environment for such investment to successfully compete. If we want to develop lower living standards then bring on the corporate tax cuts.

    Now bringing some targeted corporate tax cuts, that is a different strategic fish.

    I wonder if the back lash that seems to be building, if Harper will roll back the tax cuts.

    The optics of public cuts right along side of corporate tax cuts, are probably just enough to throw him out of office- good luck on that election campaign Mr. Harper- your gift to your corporate friends may just be your last doing. Couching it in job creation is quite laughable, given the dollar going through the roof. It would have been much easier politically easing the dollar than corp tax cuts- but not as lucrative for your corporate bosses. (at least in the short run- potentially they were hedging their bets.)

  • Travis, I won’t disagree with you. But I think the small businesses are more or less being duped. Sure, small business owners often pay crap wages and do on a direct level benefit from things like low minimum wages and anti-labour laws and atmosphere. But on a broader level, small businesses flourish when people have money in their pockets. When it’s all about driving prices down, they get cannibalized by Wal-Mart and so forth. They get little benefit from offshoring, almost none from the economy being dominated by finance, and they get hosed by the by-products of both.

    Now personally, to be sure I’d rather those small businesses were mostly little co-ops. But even as they exist, there really isn’t a percentage for them in backing the big business agenda. They’re being fooled.

    Wandering totally off topic for a moment, it’s interesting to me that those small businesses are almost all *not* little co-ops. There isn’t a whole lot legally or strictly economically stopping it from being the case. And there are places where there actually are quite a lot of little co-ops. The fact that it isn’t that way here to me suggests the importance of culture and information. There are ten gazillion books on how to start a small business, masses of little courses on how to start a small business, how to handle the taxes for a small business, how to declare part of your home as a business expense if you have a small business and so on. There is talk about small business in magazines, newspapers, TV even. Starting your own small business and growing it so you can make more money and boss more people is the most respected model of success our society has. If you’ve done that, you’re an entrepreneur, which means you’re the best. Even if you fail, it’s a respectable way to fail–you had the guts, you took risks. Nobody’s going to say “You took out a big loan to start a restaurant during a recession and now you can’t put food on your children’s table? What were you thinking?!” Rather, it’s a courageous thing to have done. So starting a business and employing other people is a widespread dream, one everyone knows about and understands. Conversely, lots of people haven’t ever heard of co-ops, or at least have only a vague idea what one might be. Nobody dreams of getting together with some good friends and starting a co-op. And nobody knows how to go about it if they wanted to, or even how to find out how to go about it. The barriers are mainly of culture and education rather than practicality.

  • I just got so frustrated with this whole corporate tax cuts discussion that I wrote a rant on “I’m a corporation and so’s my wife” at http://worthwhile.typepad.com/worthwhile_canadian_initi/2011/02/im-a-corporation-and-sos-my-wife.html. It starts out like this:

    “Women are persons in matters of pains and penalties, but are not persons in matters of rights and privileges.”

    Traditional British common law held that women and men were inherently unequal. Today, the equality of men and women is enshrined in the Canadian constitution, and we face a different legal challenge:

    Corporations are persons in matters of rights and privileges, but are not persons in matters of pains and penalties.

  • I recommend people read what Frances Woolley has to say. Very illuminating.

  • Excellent post, Frances! I was delighted to see it yesterday on WCI. I particularly liked the connection you made between limited liability and the classic rationale for corporate taxes as compensation for public services used by business.

  • Frances, your piece on this topic is superb. Congratulations.

  • Francis’ post is superb. I would suggest an addition to the final sentence,viz: “… nor responsibilities to help financially support the hand that created and nurtures them.”

  • On the original five reasons:
    1) Infrastructure spending. First, why are stimulus measures aimed at construction workers? They are not noticeably underemployed, since the housing boom has yet to bust in Canada. Second, infrastructure costs never quite come in line with initial projections, from the Trudeau-era mega-projects, through to SkyDebt aka the Rogers Centre, and then onto the Vancouver Olympics. The already employed benefit from tight labour markets.

    By contrast, funding income supports would be a better idea, whether through enhanced UI, a guaranteed income or something akin. But income supports are not necessarily job-creating measures, even if they boost aggregate demand.

    Even then, this says nothing about social expenditures or the service economy — which social services boost productivity and by what degree.

    2) Little impact. What that suggests, ironically, is that no matter the tax rates, the appetite for corporate investing is fixed in nature. Higher corporate income taxes will neither deter nor encourage investment. Thus taxes don’t affect job creation. If we extend this, it may well be that the contribution of corporate income taxes, relative to GDP, is constant. Changing the rate won’t seriously change the tax harvest.

    3) Pay More Tax to Cut Taxes. That assumes that corporate profits are unaffected by recessions. One has to disaggregate the effects of the recession from the effects of the tax cuts.

    If, as in point 1, corporate investment is the same, no matter the tax regime, over time, then tax cuts or raises are immaterial. The overall investment remains the same.

    If as, in point 2, normalizing for recessions, the tax take is relatively constant as a proportion of GDP, why do corporate tax increases or decreases not seem to make a difference? Because the incidence of the tax falls on labour income?

    4) False economies. To be sure, there are lots of infrastructure deficits. Do we resolve them over one year, five years or a longer time frame? If we do it all at once, we crowd out social services. Imagine a city council saying “we’ll cut day care subsidies so we can eliminate our infrastructure backlog, because we have federal incentives to do so. And corporations will benefit and … thus provide more jobs.” Again, the point seems to be all about employing construction workers in what is a tight labour market, not about improving social infrastructure.

    5)Working Capital. It seems that corporations aren’t spending more money than they have, unlike consumers. But they should, it is implied, spend more to produce products that consumers will buy, even though they are heavily in debt. That sounds like a lose-lose for companies and consumers. Besides, wasn’t the company overspend on all things tech responsible for 2001 recession (which we barely felt in Canada, except for Nortel employees, shareholders and pensioners)?

    I see this argument a fair bit. Corporations have money to spend so they should spend it … to produce more cars than we need, for example. I’m not at all certain that’s helpful.

    So what are the propositions in favour of higher (or the same) level of corporate income taxation:
    1) In the short term, they have money (at least on paper) for deficit reduction.
    2) Income inequality can be reduced (except that the rich draw the same proportion of their income from employment as the working stiff does).

    Are there any other ones? (I’m sure I’ll be refuted and rebutted six ways to Sunday. ;-))

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