Evaluating Tax Cuts: You Read It Here First
Don Drummond has an op-ed in today’s Toronto Star concluding:
Federal and provincial governments and the Canadian business sector should [establish] monitoring mechanisms that will permit regular reports to Canadians on whether the Canadian corporate tax revolution is producing benefits for them.
As an advocate of corporate tax cuts, he believes that such benefits exist. I am more skeptical and have long been making the arguments that Drummond seeks to counter. (A couple of years ago, he and I debated the issue of lower Canadian corporate taxes transferring revenue to the American treasury.)
However, I completely agree that we need a concrete evaluation of the promised benefits, rather than just accepting dubious claims that “a consensus in the literature†supports corporate tax cuts. Indeed, I had proposed that the Parliamentary Budget Officer undertake such evaluations a couple of years ago.
Well it depends on how they set up the test. If they simply load up a model where CIT cuts deliver a boost to investment then that will be the answer. They will just claim the counter-factual that GDP growth would have been worse without the cuts. Drummond is not dumb and he is surely aware of this fact:
http://rppe.wordpress.com/2011/06/07/a-little-perspective-on-gdp-growth-or-does-policy-matter/
The cyclically adjusted series on GDP per hour worked is even more bleak. So only a fool would set up an empirical test.
What are your thoughts on a flat tax? Would this end a lot of the back and forth about what tax rates are ideal?
Also, how do you feel about recommending the elimination of deductions as opposed to increasing taxes? I, for one, can’t stand the idea that I’m subsidizing corporate boxes at hockey games and gasoline for trucking fleets, but here we are subsidizing inefficient activities.
Since most small businesses can’t afford some of these ‘big ticket’ expenses, why should we let big corporations get away with them?
Have you ever evaluated the economic impact of eliminating wasteful tax deductions?
Thanks!
Liam
I read Drummond’s piece with mounting scepticism. He states boldly that economic theory justifies corporate tax cuts, and then call for empirical tests. If the theory is so solid why do any tests?
In fact the “theory” is not proven, there is no solid evidence that lowering corporate taxes raises investment, as Erin and the CCPA have shown. Corporations invest when they expect to make profits, not because they have more money. Lowering income taxes does allow corporations to book more profits, boost their share price, and helps the bubble economy, contributing mightily to Jimbo’s Paper Boom.
If Drummond wanted to demonstrate he has an open mind on the subject of the cuts he helped design so much the better, it will help his reputation with economic historians.
I cannot help comparing his work with that of Al Johnson, Assist. Deputy of Finance in the Pearson era who negotiated medicare, the Canadian Assistance Plan, the Canada/Quebec Pension plan, equalization payments, the Arts Bank, and grants for post-secondary education.
Somehow I don’t think corporate tax cuts measures up as public policy.
Johnson came to Ottawa from Saskatchewan where he had been Deputy Treasurer under the CCF. His book on the period Dream No Little Dreams is well worth reading.
Perhaps when Drummond writes his book he can explain the thinking behind the 1995 budget cuts that undid so much of the work done by Johnson and his colleagues in Finance in the 1960s (when I was a junior member of the Dept. on the Int. side). The rise in homelessness, and the increase in the number of destitute Canadians dates from that budget.
Duncan, love the comment. I do agree with Travis, this benchmarking process Drummond is droning on about is but cooked stew, stacked upon some very rotten meat and potatoes of the CIT cuts. I do not even have to wait for the methods to tell you it is statistical drivel.
Paul
I share the concern that tax-cutting governments and corporate Canada would provide policy-based evidence, as they have before on this question.
However, I think there is some possibility of the Parliamentary Budget Officer providing a more honest evaluation.