PEF Session at the House of Commons Finance Committee

The Progressive Economics Forum (PEF) normally hosts sessions at the Canadian Economics Association’s annual conference. But the House of Commons finance committee threw most of the PEF members testifying in its pre-budget consultations onto the same panel on November 21 and then moved it to a room without TV.

MP Randy Hoback participated in the first hour of the committee meeting, but ducked out before our panel. Fortunately, MP Mark Adler kept the spirit of Hoback alive, as you can read in the transcript posted today. My testimony began as follows:

In addition to my work as an economist for the United Steelworkers union, I also serve as the volunteer chair of an organization called the Progressive Economics Forum, which has about 200 members across Canada. I’m very proud of the fact that four of those members are sitting in front of you on this panel. Angella, Eric, and Jim are also members of the PEF. Typically, we hold sessions at the Canadian Economics Association meetings, and I’m very pleased that we’re able to hold a session at the House of Commons finance committee.

Beyond promoting the PEF, I focused on whether corporate tax cuts have boosted investment.

The federal government has slashed its general corporate tax rate in half – from 29.1% (including the former surtax) in 2000 to 15% since 2012. Because of these federal corporate tax cuts, provincial corporate tax cuts and growth in pre-tax profits, after-tax corporate profits have jumped from below 10% to 14% of GDP (excluding remitted profits of Crown corporations).

We often measure business investment as the “non-residential structures, machinery and equipment” component of expenditure-based GDP. That is a decent proxy, but it includes some non-residential investment by unincorporated entities and excludes some residential investment by corporations.

Statistics Canada’s Financial Flow Accounts allow us to examine the “non-financial capital acquisition” of corporations. These figures tell a familiar story: corporate investment has remained at 12% (or less) of GDP as corporate tax rates plummeted.

Investment is now well below after-tax profits, which is especially notable considering that “investment” includes outlays to cover depreciation but “profits” are net of depreciation. Comparisons of investment and corporate cash flow (including depreciation) indicate a much larger imbalance.

Statistics Canada’s definition of “corporations” includes Crown corporations, which are generally not subject to corporate tax. Investment by Crown corporations is quite small relative to national GDP, but has grown rapidly over the past decade (as provincial electrical utilities, for example, have had to refurbish aging infrastructure). An untold story of the Great Recession is the stabilizing effect of Crown corporations on the Canadian economy.

When Crown corporations are factored out, the story gets worse. The private corporations that gained from corporate tax cuts have actually reduced their investment as a share of Canada’s economy.

Corporate Profits and Investment as Percentages of GDP

Definitions and Sources
– After-Tax Profits = “Corporation profits after taxes” minus “Remitted profits of government business enterprises” from Statistics Canada Table 380-0078
– Corporate Sector = “Non-financial capital acquisition” of “Corporations” from Statistics Canada Table 378-0119
– Crown Corporations = “Non-financial capital acquisition” of “Non-financial government business enterprises,” “Monetary authorities” and “Financial government business enterprises” from Statistics Canada Table 378-0119
– Private Corporations = “Non-financial capital acquisition” of “Non-financial private corporations,” Chartered banks and quasi-banks,” “Insurance and pension funds” and “Total other private financial institutions” from Statistics Canada Table 378-0119
– GDP = “Gross domestic product at market prices” from Statistics Canada Table 380-0064
– 2013 = The first two quarters. Although Statistics Canada released third-quarter GDP figures on Friday, it has not yet updated its Financial Flow Accounts. The profit figures are “Seasonally adjusted at annual rates.” The investment figures are “Unadjusted” (because Statistics Canada Table 378-0119 is not seasonally adjusted).