Shock and Awful – The Truth Behind CIT Cuts
Cutting corporate income taxes doesn’t create jobs. They may raise wages, but probably not for you and me. And they mean Canadian taxpayers are paying more….to help the Americans pay down their debt Here’s how I know these things to be true:
Yesterday SUN TV rolled out its first full day of programming. The prime 8 p.m. slot features radio shock jock Charles Adler, and his show kicked off with the issue that has defined much of the election campaign thus far – corporate income tax cuts.
I was invited to weigh in on the topic, along with economist Stephen Gordon and Robert Dutton, CEO of RONA.
The whole thing was designed to get guests to deliver the clip “corporate tax cuts, good!” (insert caveman grunt), or sound like a fool for saying they’re not. More jobs! More investment! What’s not to love?
Stephen Gordon, the first guest, went wildly off message (at least the message they were expecting) with his opening statement, saying the policy of corporate income tax cuts is “not really designed to generate employment”.
He went on to say it “increases investment, increases productivity and increases wages…. It’s supposed to be set up to increase capacity, productivity. It changes the type of jobs you have; but it wouldn’t change the actual number of jobs.”
Those statements come around the 7 minute mark of this link
They didn’t post my interview with Adler, or the following one with Mr. Dutton, which was in shockingly poor taste, actually more like propaganda – though Dutton handled it with exceptional grace. The segment just got more gonzo as it went on. I had to turn off the crazy when they got to the healthcare segment.
Yesterday, also, the Globe and Mail featured an article exploring why CIT cuts may not create jobs and an on-line discussion on the topic with Mike Moffatt and yours truly. We both had Economy Lab posts. Here’s the link to Mike’s, and the link to mine.
During the on-line discussion Mike also emphasized that the primary effect of the policy is on wages, not jobs.
Recall that the CIT cut is being sold as a job creating measure. The reason is clear: as far as the electorate is concerned, that’s their only virtue.
When you get the main proponents for the measure saying they primarily affect wages, not jobs, everyone should do a double take.
It makes sense – the theory says corporations don’t pay taxes, they shift the costs in the form of higher prices, lower wages and sometimes lower dividends to shareholders.
Cutting corporate taxes should, theoretically, mean lower prices, higher wages or increased dividends. I’ve argued elsewhere why the chances are slim that the benefits would flow to workers or consumers, given the bargaining power of corporations these days.
So when the theory says wages will go up, watch out. Because the wage improvements on the menu are not likely to be for the majority of workers, in the economy or even in the firm that does the investing. They are likely to go the CEO and other top managers. That’s the lesson of the decade prior to the global economic crisis – the richest 1% took one third of the income gains from economic growth in that time. They took 8% in the 1960s, a comparable period of sustained and robust growth. They’ll take it in wages, they’ll take it in dividends. But they’ll take it.
Today Munir Sheikh — the Chief Statistician who was forced out of Statistics Canada by the Harper Government for refusing to lie to the Canadian public — uses his considerable political capital to clarify how a further reduction in our corporate income tax levels would simply send more money to the U.S. Treasury.
I mentioned this in my interview with Charles Adler last night. He framed the CIT cuts as “common sense”, that even the Liberals cut them when they were sensible, and marshalled a clip of John Manley to make the point.
I noted that the CIT cuts were introduced by the Liberals when the public treasury was in surplus, not deficit. I noted that today we are standing in a $40 billion deficit hole, and that we will have to borrow the money to offer this windfall to big corporations (whether they invest or not, whether they create jobs or not), a direct cost to the Canadian taxpayer who gets little or no benefit out of the deal. I noted that, because of the degree of foreign ownership here, the “common sense” being promoted essentially asks Canadians to pay more to help pay down deficits elsewhere.
So CIT cuts don’t create jobs. They may raise wages, but probably not for you and me. And we’ll be paying more to help the Americans pay down their debt.
What’s not to love?
The reason the interview with you was NOT posted was because Charles Adler was visibly embarrassed by what you said, and he was not able to counter your sound arguments against corporate tax cuts. You made a very strong case for targeted tax cuts for corporations that do more than just take the money and run, or merge and acquire, but Adler couldn’t/didn’t hear or acknowledge that.
He tried to paint you into a corner, accusing you of being an idealogue, when in fact SUN-TV is profoundly ideological in the worst possible way. And you won the “argument” hands down. He said he would invite you back. As much as that is tantamount to submitting yourself to a kind of torture, I hope he does invite you, and that you accept.
Great post and I worship at the temple of Yalnizyan.
And yet, I must protest against Ms. Yalnizyan’s grammar. Please do not perpetuate ungrammatical convention; the text should read:
“probably not for you and ME.”
and
“an on-line discussion on the topic with Mike Moffatt and ME.” (or possibly “myself” in the context given)
Ms. Yalnizyan: you would not write “They will not raise wages for I”, would you?
As a brilliant economist and economic justice award recipient, you have to set a better example for your heterodox economics disciples!
Done! Thanks!
Great post.
In the interest of completeness, Munir Sheikh left two inconvenient facts out of his article:
1) Provincial corporate tax rates, once you’re out of the small business tax regime, are nontrivial in every province in Canada:
(http://www.canadabusinesstax.com/corporate-income-tax-rates/)
However, in the U.S. there are a number of zero corporate income tax states, and the states that have corporate income tax rates generally have lower rates than Canadian provinces:
(http://www.taxadmin.org/fta/rate/corp_inc.pdf)
So comparing only federal rates is incomplete.
2) The Americans are talking seriously about dropping their corporate income tax rate:
(http://www.bloomberg.com/news/2011-04-07/ryan-s-rate-target-would-force-2-9-trillion-in-tax-break-cuts.html)
So an analysis ignoring this point is incomplete.
Other than that, it was a great article.
Another point that bothers me about this debate.
The traditional macro used in canada over the recent past is dollar valuation that effects investment. We went from 15 years of .80$ and below which helped create the biggest expansion in terms of growth during the mid 90’s to early 00’s. And that is with high cit. So why not stoke the dollar argument.
We are heading for a reef, the dollar is the elephant in the room right now, not cit rates. Inflation rate spikes yesterday
Which will bring about a whack of inflation hawks, and cdn rates will undoubtedly rise, which could put more upward pressure on the dollar. Instability in oil supply is not helping either.
So I just do not see investment in non- resource extraction coming north of the USA no matter what level the marginal impact of cit rates are on investment.
I do think we need to start framing the cit in terms of the entire causal chain for investment.
Moffit’s exchange with you yesterday was quite humorous, i had a few comments posted and again he just kept changing his defensive stance. Oddly enough the defenders of the cit cuts just seem oblivious to empirical evidence and want to stick to models and predictions. How about reality! The past 20 years and the impact of cit on employment.
The era of Reagan economics relied heavily on the ‘truism’ postulated by the Laffer curve which showed an inverse relationship between corporate tax rates and tax revenue – the idea being that a decline in the corporate tax rate initially generated higher tax revenues through more vibrant economic activity, but once an equilibrium point was reached, they generated a decline in tax revenues . The problem is that we do not know where we stand relative to the equilibrium point, and for all we know, we may even have passed that point. So we are mucking around in the dark, but it sure makes for great politics.
I do believe that lower corporate taxes generate higher dividends; they certainly do help executive pay (given that their remuneration is conventionally tied to after-tax profits), but I have seen no evidence that they make for higher wages or lower prices.
Armine,
I do not know if you have had a chance to look the working paper by Michael Spence and Sandile Hlatshwayo of the Council on Foreign Relation (2011) on “The Evolving Structure of the American Economy and the Employment Challenge.”
It is quite good and they make the point that empirically productivity growth is not associated with higher wages in general but rather with higher wages at the top end and less job creation (and poorer quality) in the tradable sector. So even if Mike et al were right that decreases in CITs lead to increased investment and increased productivity the impact on wages is dubious and perhaps negative in terms of employment.
Here is a blurb from the intro:
The trends in value added per employee are consistent with the adverse movements in the distribution
of U.S. income over the past twenty years, particularly the subdued income growth in the middle of the income range. The tradable side of the economy is shifting up the value-added chain with lower and middle components of these chains moving abroad, especially to the rapidly growing emerging markets. The latter themselves are moving rapidly up the value-added chains, and higher paying jobs may therefore leave the United States, following the migration pattern of lower-paying ones. The evolution of the U.S. economy supports the notion of there being a long-term structural
challenge with respect to the quantity and quality of employment opportunities in the United States.
http://www.nationalpost.com/todays-paper/swedish+taxes/4619695/story.html
Try swedish taxes
Larry Kazdan, National Post · Apr. 15, 2011 | Last Updated: Apr. 15, 2011 4:18 AM ET
Re: “Harper challenged on corporate tax cuts in debate,” Tim Shufelt, April 12, online only
When Stephen Harper refers to “every credible economic analyst,” he really means any economist with whose point of view he agrees. In fact, there are many studies by reputable economists that show infrastructure and program spending provides as many or more benefits than across-the-board corporate tax cuts that will reward companies whether they create jobs or kill them.
Larry Kazdan, CGA, Vancouver