Robin Hood Economics

Canada’s economic context at the time of Election 2011 is one of “precarious recovery”, and overall demand conditions are weakened by a few major factors. Unemployment is still just under 8%, which is good compared to the double-digit unemployment of the early 1990s, but not great compared to the expansions of the late 1990s and 2000s. Too much of the employment gains that have come are in part-time jobs, so added to the 1.5 million unemployed are another half-million or so who are under-employed.

That is not good for businesses in Canada. Nor is the fact that one-third of the gains in income over the past decade have gone to the top 1% of households. The super-rich use this income as a means of keeping score, but it is not spent in the real economy. Canada’s wealthiest could have $100,000 fall out of the trunk of their Porches and not even notice. Yet, further down the income ladder, we see record levels of household debt that are contraining spending.

Again, not good for business. A good business climate is one in which demand is strong, where people have good incomes are spending them on good and services (though I’d add with carbon taxes making it much more expensive to purchase carbon-intensive goods and services). This is especially true for small businesses in Canada, who are tapping domestic demand not US or global markets.

Too much of our leading economic thinkers have been swayed by the idea that corporate income tax cuts are needed in order to improve incentives for new investment. As this blog has pointed out repeatedly, this supply-side economics has not delivered even on its own terms, and at a massive cost to the public treasury. If anything, corporate tax cuts have been a lost opportunity for much-needed investments in infrastructure and social programs.

This is, in large part, because the corporate sector has been accumulating surpluses. As Jim pointed out recently, the net of after-tax profits less new investment has led to a $500 billion surplus in the corporate sector over the past decade-plus. Corporate income tax cuts only add to this cushion, and do almost nothing to further new investment because investment is driven by demand conditions. We have just provided windfalls to the most profitable corporations in Canada, in particular the big banks, oil and gas companies and telecom/media industries.

Raising corporate income taxes, as the Liberals (from 16.5% to 18%) and NDP (to 19.5%) have suggested, would drain some of this surplus and put it to work. We could rebuild our infrastructure, reduce poverty and reinvest in our social programs. This would address real and pressing needs in the country (as opposed to jets and jails), create good jobs and reduce unemployment. We could consider providing tax credits to business for new investment (in place of across-the-board tax cuts) but the key point is to focus on effective demand in the economy.

So, a little Robin Hood in our economic planning would do a lot of good, and as the economy rises so the deficit would fall. Adding in some new tax brackets for very high incomes, as the AFB has recommended, would be even better. Remember that corporate income tax cuts are tax cuts for the richest Canadians. Our economic policies should be judged by whether they increase inequality or not. We know that lower levels of inequality are better not just in stronger demand, but also in terms of broader health and social outcomes. A simple test: does this policy further enrich the already wealthy? If so, it must be rejected.

5 comments

  • “Remember that corporate income tax cuts are tax cuts for the richest Canadians.”

    What if the incidence of a higher CIT is mostly on labour due to compensating in the form of lower wages? Then it would seem harder to make this argument.

    Likewise, raising the high marginal PIT rate from 29% to 35% was estimated by Broadbent to raise $3.8 billion. On a budget of ~$250 billion, that’s not a lot.

    I tend to think that if there is going to be “heavy lifting” on antipoverty issues then the middle class will need to be dinged for it.

  • The incidence question is interesting, though there seems no evidence that lower corporate taxes have shown up as higher wages, so why would it be the other way around?

  • I’m not sure. Stephen Gordon has a list of some of the literature here, I hope to read through it soon: http://www.ecn.ulaval.ca/~sgor/cit/

  • “…so why would it be the other way around?”

    Because god created the world and god is a neoclassical economist. QED.

  • Given that Harper seems to think his one saving grace is to run a major component of his campaign on the economy, tells me that progressives have failed to convince many that having an economy based on oil and other resource extraction is a sane way to move into the future. As it stands, manufacturing has never recovered, and forestry is still in the doldrums. No comprehensive plan has ever taken aim at growing these two key parts of the economy.

    Yet as we sit here and listen to the Tory rhetoric, a further corporate tax cut will fatten the most profitable sectors, of oil, finance and resource extraction.

Leave a Reply

Your email address will not be published.