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.  (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,  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 profits  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%.  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 of  32% from 2007-08 to 2012 and beyond  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.

9 comments

  • I think that the Conservatives might argue that cutting corporate income tax would increase GDP to make up for the cut. While I certainly don’t believe it is true, talking about CIT revenue as a percentage of GDP doesn’t really address their argument.

  • Jim Flaherty seems to be echoing what Stockwell Day said in September. As I pointed out on this blog and on BNN, the recent corporate tax cut from 22% to 15% would have to expand profits by 47% to pay for itself. But Andrew is correct that the whole corporate tax cut from 29% to 15% would have to expand profits by almost 100% to pay for itself.

    At the time, I asked Day whether the government would be releasing documents to support his claims of tax cuts boosting revenues. He promised that such documents were forthcoming. However, October’s fiscal update contained not only the numbers cited by Andrew, but also the following statement: “corporate income tax revenues are projected to grow as the economy recovers, partially offset by additional reductions in the general corporate income tax rate” (page 36; italics added).

    So, even after Conservative politicians started promoting the myth of self-financing tax cuts, the Department of Finance again published the reality that tax cuts are a drag on revenue.

  • somebody needs to take this on in the house. when do they sit again?

    Anything that can bring light to the corporate tax cuts needs to have the electioneering spot light. If the liberals and the NDP cannot form a coalition, they should at least be strategic in their election campaign and start ganging up on the tories.

    The tories know this is one election issue that will resonate like a mosquito in the ear of voters. So they are trying to change the frequency of such droning. Come on liberals and New Democrats, take this issue and run with it.

  • The liberals won’t, they get paid by the same corporations as the conservatives.
    The NDP don’t dare get serious about talking that line, and when they do they are either not listened to by or shouted down in the media (who after all are large corporations who don’t want their profits taxed, as are their advertisers).

  • I don’t know, it seems like a relatively easy rebuttal to make. Given that tax cuts do not pay for themselves and therefore either will need to be followed by increased taxes on individuals or program cuts. Keep repeating and force the cons to answer which they are going to do. When they get tired they will fall back on CIT cuts pay for themselves and then repeat the phrase “wishful thinking” for the news cycle.

    I am somewhat heartened that the Dept. of Finance will not play.

  • The Conservatives think the corporate tax cuts are a winner for them. They are using it as a wedge issue to separate the Liberals (and NDP) from their CFIB allies, business in general, and corporate media commentary. Painting the Liberals as an anti-business is the idea. I have a piece on rabble about this, and Bloomberg is reporting today on the Conservative campaign to promote corporate tax cuts.
    How do you fight back? How about using corporate tax revenue as a percentage of total tax take, starting after the war when it was well over 50 percent and taking it to today. Compared to personal revenue it makes Pauls point above. Also why not highlight Erins argument about how the Americans not the Canadians will collect the foregone revenue. Also why not use it to highlight how environmental destructive resource companies get off freer, and foreign owned corporations get yet more gifts.

  • No current political party has the courage to raise corporate taxes and take on big business head-on.

  • Flaherty is just echoing Mintz:
    “Canada could reduce corporate income tax rates, possibly increasing revenue or at worst losing little.”
    – 2007 Tax Competitiveness Report: a call for comprehensive tax reform

  • Indeed. Why does Flaherty need a Department of Finance when he has Jack Mintz?

    Of course, Mintz made that comment when corporate tax rates were higher. The report you cite claimed a “tax-revenue-maximizing rate of 28 percent,” which contradicts Flaherty’s assertion that slashing the combined federal-provincial rate to 25 percent will not reduce corporate tax revenues.

Leave a Reply

Your email address will not be published.