Flaherty Misleads on Corporate Tax Cuts
It is one thing to argue (as the CME did last week) that corporate income tax cuts boost GDP via higher investment and thus generate some offsetting increase in revenues.Â (See Erin’s post for a good critique.)
It is quite another thing for Finance Minister Flaherty to argue that CIT rate cuts generate fully offsetting CIT revenues.
Here is what Flaherty said on Power and Politics last week (as cited in the Globe):
“There’s a false assumption there which is really dumb – that is, by reducing business taxes , we reduce business tax revenue to the Government of Canada. That’s simplistic and, in fact is wrong. If we look at the tax revenues of the Government of Canada – corproate income tax revenues – they have gone up during the time that we have been reducing the tax burden.”
The Globe story was skeptical in tone but could have been more forthright in showing why such a claim is transparently absurd.
Since the federal corporate tax rate is being cut in half from 2000,Â GDP would have to double to fully offset the revenue impacts of changes which cut CIT revenues in half as a share of profits, or corporate profitsÂ would have to double as a share of GDP, or some combination of the two would have to take place.
No such absurd claim has ever been made by the Department of Finance.
The most recent Economic and Fiscal Update (Table 3.4) projects that CIT revenues will stabilize at 1.8% of GDP in 2011-12 and beyond when the tax rate will be 15%.Â That is well down from 2.6% in 2006-07 and 2.7% in 2007-08 (when the tax rate was 22.1%.)
It is striking that a cut in the corporate tax rate ofÂ 32% from 2007-08 to 2012 and beyondÂ is expected to b e accompanied by a 33% fall in CIT revenues as a share of GDP over those same periods.
The 2008 Budget – tabled well before the recession – was the first to appear since the announcement that corporate tax rate cuts would be accelerated.
Table 5.4 showed that CIT revenues were projected to fall from 2.8% of GDP in 2007-08 to 2.2% in 2009-10 and it was stated in accompanying commentary (p.202) that “corporate income taxes are projected to be dampened by tax relief measures.”
The Conservatives should revise their misleading talking points on this one.