The Race To The Trough: What Did Corporate Tax Cuts Deliver?

The CLC today celebrated Corporate Tax Freedom Day – defined as the day on which corporations have paid their share of all government taxes.  It featured a race of mechanical pigs to a trough full of cash – with the pigs wearing the colours of leading Canadian corporations with large cash reserves. Watch the video.

(Update – The Global TV video.)

The winner? Potash Corporation of Saskatchewan  with over $5 Billion of surplus cash on its books at the end of 2010 (and that was after a $2 Billion purchase of their own shares.)

The background paper was written by David Macdonald and myself. The summary follows. And there was an op ed from CLC President Ken Georgetti in the Toronto Star today

Here is the Summary:

Due to ongoing corporate tax cuts, corporate income taxes make up a falling share of all government revenues. In fact, by the end of January, corporations will have fully paid their share of taxes.

The general federal corporate income tax rate stood at 28% in 2000. It was cut to 21% under the Liberals, and then cut in stages, from 21% to 15%, under the Conservatives. The most recent cut was from 16.5% to 15%, effective January 1, 2012.

Each one percentage point cut to the corporate income tax rate costs the federal government about $2 billion in annual revenues.

The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs. However, studies have shown that rising corporate after-tax profits have not resulted in increased real investment.

This study looks at the profits and investments of Canada’s largest companies, those listed on the S&P/TSX Composite Index, from 2000 to 2010.

In line with cuts to the statutory federal and provincial tax rate, the effective tax rate (that is, taxes actually paid by Canada’s largest companies to the federal and provincial governments as a share of pretax profits) has fallen from one third in the early 2000s (35% in 2000), to between one fifth and one quarter (24% in 2010).

Companies have used increased after-tax profits to boost dividends paid out to their shareholders. Dividends as a percentage of after-tax profits have risen from 30% in 2000 to over 50% in recent years.

Companies have also chosen to retain higher after-tax profits as financial assets, as cash, and as longer term assets, not counting investments in capital stock.

The study looks at the change in the assets of Canada’s largest non-financial companies. (Financial companies and conglomerates are excluded because they typically hold large financial investments as part of their ongoing business.)

The Top-10 Corporate Hoarders have collectively accumulated $30.7 billion in extra short- and long-term assets between 2000 and 2010, since 2000.  The leading cash hoarder has been Potash Corporation of Saskatchewan, which accumulated over $5 billion in assets over this period.

The Appendix lists Canada’s top Corporate Hoarders.

Cuts to corporate taxes have resulted in a major loss of government revenues, without the anticipated result of higher corporate investment in machinery and equipment, new plants, and other areas of company operations. Instead, we have seen a big increase in dividend payouts and in financial assets.

10 comments

  • “cuts to corporate taxes have resulted in a major loss of government revenues”, besides the other negative impacts you mention, isn’t it really all about the ideology of right wing politicians to reduce the size of government so that the private sector can take over??

  • “isn’t it really all about the ideology of right wing politicians to reduce the size of government so that the private sector can take over??”

    That sounds about right. But to understand the right you need to understand that they think that shrinking the government is necessary to ensure that the government does not take over. Because you know a government take over of private property has been the single biggest proposal in every major political parties platform for the last 30 years:);

    In North America it is only Greg Mankiw and Stephen Harper that stand between us and those that would make your family dog state property. Thank god for bad haircuts.

  • When the rate of investment is regressed on the real corporate tax rate, by which I mean Stats Can data on corporate taxes actually paid as a proportion of corporate profits, while controlling for the usual other independent variables, the result is very significant, high coefficients using OLS. Is it violations of the OLS assumptions that generate this result or is right wing ideology actually true? While I’m at it, does anyone know why real corporate tax rates spike in recessions?

  • david wrote:

    “isn’t it really all about the ideology of right wing politicians to reduce the size of government so that the private sector can take over??”

    Then they’re too late.

  • ““One fact we know is that in all of the countries that have lowered their corporate rates in recent years, they still collected the same amount in revenues or more.”
    – Reuven S. Avi-Yonah, tax lawyer and lecturer, U of Michigan

  • Of course, nothing came from corporate tax cuts. Harper, if he is a true economist, he would know. A business hires all of the workers it needs, all the equipment and supplies it needs, in order to produce the maximum value. After all of these things are paid for, and the corporation has profits left over, why would they need to hire anybody else, or invest any further? They already have met their needs! If the business is going to grow, it isn’t because of tax cuts. It will be only because of demand, more consumers wanting more of their products, so the corporation would have to ramp up its production by hiring more people, etc. Also, most of the smaller companies do not make major profits, but do have excellent cash flow, which means they can continue to grow, as required by consumer demand. However, because Harper’s policy choices in other areas are diminishing consumer buying power by creating more unemployment and underemployment, I don’t see much investment in these companies in the future, unless the government, which it probably will, pay them more corporate welfare, under the pretext that if a factory can make more cars, that somehow consumers will buy them, flat broke or not. I am so insulted by this government; he is not preaching to the stupid and the ignorant.

  • The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs.

    No. That’s not the argument. At least, I’ve never heard anyone make it.

  • So what is the argument for lower corp income taxes? (at least according to you Gordon?) I had thought it was either to induce greenfield or brownfield investment and supposedly increase jobs? That is the argument I have heard come slithering out of the jaws of Clements and Flaherty as part of the Tory sales job over the life of these cuts.

  • http://rppe.org/?p=2580

    Nice one Travis, I especially like your last point.

    I guess to be fair before Gordon starts blowing up the lab we should give him an opportunity to give an explanation. However, the reality is, do we even care? I refuse to fall for his blah anymore. Someday I hope the press does the same.

  • Paul,
    Pretty sad: “I never heard anyone say that but I wrote a blog post arguing the opposite of that which is popularly understood but I have never heard.”

    Sad, very sad. but here we are.

Leave a Reply

Your email address will not be published.