March 08, 2010

ANALYSIS: Corporate Tax Cuts Create Jobs? Prove it!

Context

“Lower corporate income taxes result in more business investment by both domestic and foreign firms operating in Canada, which leads to new and better jobs and increased living standards for Canadians.”(Dept of Finance, 2008)

In 2000, then Liberal Finance Minister Paul Martin cut corporate income tax rates by a quarter, from 28% to 21%, to be phased in over five years. The Harper Government has continued those cuts from 21% in 2007 to 18% today. Yesterday’s budget confirmed that Mr Harper is ignoring NDP advice and will further reduce that rate to 15% in 2012. Those cuts have taken hundreds of billions of dollars out of the revenues that pay for health care, education, infrastructure and fighting climate change.

Why did they do it? They say that such cuts create jobs, through investment and innovation in our future economy. But do they really?

They also argue that we need these cuts to be competitive: Another canard.

The evidence suggests these assertions are misleading and wrong-headed. Who says? Statistics Canada, Finance Canada, leading economists and former Privy Council Clerks.

The facts

Corporate tax breaks haven’t stimulated investment

Despite a 36% drop in corporate taxes (both federal and provincial) in the last decade, and record profits for much of that time, business spending on machinery and equipment has declined as a share of GDP, and total business investment spending has declined as a percentage of corporate cash flow. (Source: Statistics Canada and Finance Canada)

Corporate tax breaks haven’t stimulated innovation

The intensity of IT use by Canadian businesses is only half that of the US. (Kevin Lynch, former Clerk of the Privy Council and Cabinet Secretary). In 2007, Canadian business spending on R&D, about 1% of GDP, ranked 14th in the OECD, well below the average 1.6%, and only a third that of Sweden, Finland and Korea.

Corporate tax breaks haven’t increased productivity

Kevin Lynch says that, despite Canadian corporate tax rates well below those of the United States, “business-sector productivity growth was actually worse in the decade just ended.” Low productivity growth, of course, is a sign that business has not invested in new labour-saving technologies or in productivity-enhancing R&D.

Canada’s business-sector productivity in 2007 was 75% of that of the US, down from 90% in the early 1980s. This despite cuts in federal corporate income tax rates from nearly 40% to the current 18%.

More competitive?

In 1999, the year before Paul Martin’s tax cuts, Canada was 5th in the World Economic Forum’s competitiveness list. Today, we are in 9th place. That’s well behind most Nordic countries who collect as much as 50% of their GDP in taxes each year. Clearly, the link between tax cuts and performance is a myth.

Far from tax cuts influencing business investment decisions, “If anything, corporate investment performance has become weaker, even as corporate taxes have been deeply cut.” (Stanford, CCPA, 2008)

In 2007, before the Harper corporate income tax cuts began, Canada’s combined federal and provincial corporate income tax rate was already below the combined state and federal rate of our chief competitor, the US, and below the rates of all but one other G-7 member, the UK. When the Harper cuts are fully implemented, Canada will have the lowest rate in the G-7 by far, 12 percentage point below the comparable US rate.

Conclusion

Corporate profits in Canada are on the rise, investment, innovation and productivity continue to lag.

It is a myth that corporate tax cuts create jobs in Canada – a dangerous myth that leads to reduced support for essential programs, services and infrastructure on which Canadians rely. It also leads to a bigger deficits, higher debt payments and increased taxes for the rest of us.