The Conference Board on Weak Business Investment

I do not know if the Conference Board intended its latest release on sluggish investment in machinery and equipment to be taken up during the election campaign. However, as Canadian Press reports:

The Conference Board report comes at a time when the issue of corporate taxes is a key demarcation point among the parties in the election campaign, with the Conservatives favouring lower taxes to boost investment and the opposition parties calling for the rate to be hiked.

Labour economists such as Jim Stanford and Erin Weir, as well as the Canadian Centre for Policy Alternatives, have published charts showing investments did not increase as combined federal-provincial corporate tax rates slid from about 42 per cent at the turn of the century to the current 28 per cent. . . .

The perceived lack of payoff for the many carrots thrown at firms has frustrated policy makers. Finance Minister Jim Flaherty has on several occasions urged firms to play their part. . . .

[The Conference Board’s Glen] Hodgson says the issue of why Canadian firms have lagged behind for such a long time is complex, but he believes most business decisions are rational. “It’s not a question of blame.”

I agree with Hodgson that it is not a matter of blaming or jawboning corporate Canada. Businesses do try to make rational investment decisions and corporate tax rates have little effect on those decisions.

3 comments

  • Denise Freedman

    It is rational for corporations not to invest when they have made the ‘rational’ decision they will not make money, an appropriate rate of return on their ‘investment.’

    They why is it ‘rational’ for us to create a political economic environment since 1980, as Stanford has shown us, to create the conditions for corporations, many foreign, to do exactly this? When they do not do so?

    Is it not ‘rational’ for those of us who are actually living persons, not corporate entities, to create an environment of public goods–education, health care, social assistance, etc.–for OUR good and not THEIRS?

    And it is just this stark.

  • And the Zombie replies: “But, But without the tax cuts investment would have been even lower!”

  • If corporate tax cuts have not lead to increased investment or jobs, what is the theoretical explanation for this? It’s possible to use standard economic analysis to give an answer: much of corporate profits are economic rent, also known as monopoly profits. Taxing them or untaxing them has very little effect on the behaviour of corporations – on their decisions about whether to invest in productivity or hire new workers.

    Mainstream (aka neoclassical) economists de-emphasize the concept of monopoly power and economic rent simply by assuming that markets tend towards perfect competition and in the long run, surplus profits get competed away. But what if this isn’t the case? What if companies are able to consistently earn economic rents through their sheer market power or through controlling the laws of the land? In short, through rent seeking.

    The economist.com says this about economic rent: “Reducing rent does not change production decisions, so economic rent can be taxed without any adverse impact on the real economy, assuming that it really is rent.”

    http://www.economist.com/research/Economics/alphabetic.cfm?letter=R#rent

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