Corporate Tax Cuts and Investment

It is notable that the Globe has run a major story today – on p.1, above the fold in the print edition – drawing attention to the fact that recent  corporate tax rate cuts have not produced an increase in real business investment. Reference is made to the views of labour economists.

The Globe story will not be “news” to regular readers of this blog,  but it sure helps get the message out!

It is interesting to note that corporate profits have rebounded very strongly in the recent recovery. Following the recession of the early 1990s, it took until 1994 for corporate pre tax profits to regain the nominal level fo 1989.

Corporate pre tax profits in the fourth quarter of 2010 were 11.2% of GDP, still shy of the high of 13.6% in 2008, but well above the recession low of 8.9% in the second quarter of 2009.

Total corporate pre tax profits rose by $50.6 Billion or by 38% from the bottom of the recession in the second quarter of 2009 to the fourth quarter of 2010. That is almost as much as the $53.1 Billion increase in total labour income over the same period.

Meanwhile, non residential business investment has risen by only 8.8% (measured in real terms) since the bottom of the recession.

Tax breaks targeted to companies which invest and create jobs will put profits to work more effectively than more across the board cuts to the corporate tax rate.

9 comments

  • I feel the government should parallel corporate tax cuts with other incentives for real business investment, and should also focus on relaxed tax programs for small businesses, which are the real driver of job creation in North America over the past 20 years.

    Cheers!

  • potentially I may have to retract my comment yesterday- maybe the ghost of Travers heard us at the PEF and paid a visit to the printing machine at the Globe as I am a bit surprised to see such a decent story.

    Hail Jim T. we miss you – and a pint for Karen Howlett and the editor at the GM for this article- cheers.

  • David M. also put out a nice CCPA release today on the same subject, a pint for David as well. I am sure he will post it up here soon.

  • Toby S should also get a pint for this one as well, as his analytical work was instrumental.

    I am very jealous Toby, I am gonna top you on this, back to my economics lab I have some promising blue prints to re-examine. I wish I had that damn employment quality index. When this election is over- that is it! I am going to build that damn thing once and for all and I am going to make it an automated web application that once statcan releases monthly data the thing will update itself and become a live economic smart machine using web 5.0 tech- eternally crunching employment data and automated analysis live and on the web (kind of sounds like me).

  • Has any read the response in the Globe’s economy lab by Stephen Gordon ?

  • “Has any read the response in the Globe’s economy lab by…”

    Wow an anecdote about hedonistic deflators backed-up by a summary of counter-factual analyses resting on neoclassical assumptions.

    I will stick with the facts. Nominal Investment as a share of nominal GDP is down and productivity growth has been dismal. And the best lipstick that can be put on this pig is it would be uglier without the CIT cuts.

  • Here’s my comment on the story and response to Gordon’s piece.

    Corporate tax cut boosters Jack Mintz and Stephen Gordon will predictably attack this in different ways by citing various academic studies and also saying that people should look at inflation adjusted dollars instead of current dollars.
    http://www.theglobeandmail.com/report-on-business/economy/economy-lab/stephen-gordon/corporate-tax-cuts-a-look-under-the-hood/article1972965/

    The reality is that the economy operates in nominal dollars, not inflation adjusted dollars. Corporate profits are in nominal dollars, as are taxes, as is investment Besides, there are many problems with the way the real value of that investment is calculated by Statscan.

    The fact is that corporations have more than doubled their cash reserve over the past decade to over $500 billion, money that isn’t going into investments in the economy. Lower costs for machinery and equipment should mean that corporate tax cuts are not needed to spur investment with most of it is just going into excess cash.

    It’s absolutely true there are many other factors that affect investment: corporate taxes are only a small part of total costs. The studies Gordon refers to use data before the financial crash, when Ireland and Iceland were leading the race to the bottom on corporate tax cuts. Look at where they are now.

  • The main G&M story says “Investment in equipment and machinery has fallen to 5.5 per cent in 2010 as a share of Canada’s total economic output from 6.8 per cent in 2005 and 7.7 per cent in 2000, The Globe analysis shows.”

    Yet the infographic on Stephen Gordon’s post is totally incompatible with this contention.

    In any case, you guys should be happy, what Stephen Gordon writes is never going to get the readership that something by a regular G&M journalist gets and this journalist not only characterizes the international consensus of economists as “sharply divided” (if there is no consensus why is the trend downwards? Have consumption taxes trended upwards absent a consensus?) but writes:
    “The issue boils down to this: At a time when Ottawa and many provinces are awash in deficit, should governments invest scarce resources in making life more affordable for families by enhancing social programs or in giving corporations additional tax cuts?”

    You can hardly ask for more favourable framing than that.

  • Actually the supposed “rise” in real investment shows as small bump when one looks at the data over a twenty year cycle, and it really becomes insignificant when compared to the explosion in liquid assets. I should be posting on this soon, with some new data.

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