Value Added? The Dubious Impact of Corporate Income Taxes

Corporate tax cuts have become a defining feature of the election campaign thus far.

The Globe and Mail covered the topic today with an article entitled “Corporate tax cuts don’t spur growth“.

Stephen Gordon fired off a critique of the piece in his latest blog at the Globe and Mail’s Economy Lab, to which I am also a regular contributor.

Here’s two responses to his two main points – that there has been more investment in real terms, notwithstanding Stat Can figures showing a decline; and that CIT cuts “are associated with” higher investments than would otherwise have been the case.

First: The big story behind corporate investments is what types of things that are being invested in. The fastest growing category of business investment is computers, growing from 9.2% of all business investment in machinery and equipment in 2000, when the big tax cuts started, to 20.7% in 2010. That’s up from only 4.5% in 1997, when the most sustained period of economic growth since the 1960s began.

Some of that investment replaces obsolete technology and introduces important efficiencies. Some of that is simply keeping up with the latest gadgets and software. It is an open question how much productivity improvement results from these investments.

But there is little question that some business investments actual lead to a decline in value-added production. For over a decade, foreign corporations have been buying up our resources and shipping value-added production elsewhere …. Along with middle class jobs. The Vale Inco story is a striking example, no pun intended.

As to the second point, that corporate tax cuts are associated with economic growth: a correlation does not a cause make.

A period of aggressive reduction to corporate income taxes is indeed associated with a period of rapid economic growth in Canada.

But that same period saw the emergence of the BRIC – Brazil, Russia, India and China – as the major new forces propelling the global supply chain.

These nations have been the true engines of global economic growth for the better part of a decade. These days they’ve been pulling the advanced industrial nations out of the slump, through rising aggregate demand.

The first beneficiaries of the recovery are the nations that have the raw materials essential to the production process.

Canada is one such nation, along with an constellation of emerging economies in Africa and South East Asia, rich in natural resources or cheap labour.

At this point in the business cycle investors are coming here for two reasons: natural resources, and a safe place to park their money in an unstable world. The fastest growing category of incoming foreign direct investment is bonds.

Investors are not primarily coming here because of our tax regime.

There is no dispute that corporate income taxes are important to decision-makers. But they are only one item towards the end of a long list of why companies invest or disinvest in a particular place.

First in that list is growing demand for their product or service. Second is the rate of return.

Taxes are an important consideration, but only at the margin, when everything else is equal, for companies choosing to invest or divest in a particular place.

Let’s look at the big picture. Canada has been hemorrhaging value-added production and jobs with decent wages, benefits and pensions.

If you are committed to using billions of dollars to incent behavior, target it to getting what you want: value-added investments and good jobs.

Corporate investment and corporate income taxes are important. But business interests are not synonymous with the public interest. And the bottom line for most Canadians is their own well-being.

The litmus test for any public policy is not just the costs and benefits, but the distribution of the costs and benefits.

It is surprising how corporate tax cuts and income splitting became two hot button topics in this federal election campaign.

The first leg of the election campaign has quickly turned into a conversation about income inequality and who benefits from this or that policy. Nothing could be more appropriate in the wake of the worst global economic meltdowns in two generations.

“Who benefits” is the central question that should be asked when a policy proposal is advanced. It is even more pertinent in the middle of an election campaign.

Armine Yalnizyan is a Senior Economist with the CCPA.

3 comments

  1. It is intriguing to see a conservative commentator once again flying in the face of Stats Can data. I.e. Stats Can saying that investment is declining despite corporate tax cuts with Stephen Gordon asserting that these very same tax cuts are spurring investment. His argument being I presume, “Things would have been worse otherwise.”

    This is reminiscent of nothing so much as it is the now thirty year long mantra of tax cuts as the cure regardless of the illness.

    Government surplus? Tax cuts. Government deficits? Tax cuts. High growth? Tax cuts. Low, no or negative growth? Tax cuts. Record corporate profits? Tax cuts. Low corporate profits? Tax cuts.

    Discussions of the drawbacks to monomania aside, how is this “tide that will float all ships” working out so far?

    Well south of the border where this program was first and most fiercely implemented thirty years ago the results are in and extremely clear. The investment and corporate classes are unsurprisingly making out very well indeed thank you very much. Meanwhile those who make up the bottom four quintiles have at best kept up with inflation. Many not doing even that well.

    At the same time they have seen their government saddle the citizenry with an ever rising debt that will have to be repaid in some manner or other, while decent pensions and work paid medical care are disappearing. The other indisputable facts are that value added jobs have disappeared in the millions, exacerbating an already debilitating trade deficit. Unemployment, foreclosures and bankruptcies are very close to historic highs, and people’s principal asset – their houses – lost on the order of $8 trillion in value. This right on the heels of a $5 trillion write down on their 401 K’s due to the bursting of the tech bubble.

    Here at home we are witnessing a reprise of the American model. I.e. Like Reagan and the Bushes before him with ‘The Harper Government’ we have a self-avowed fiscal conservative running up the largest deficit in the history of his nation. Like the Americans we also have tax cuts for the investment and corporate classes and here too they are as a result making off with pretty much all of the economic gains. Meanwhile the bottom four quintiles of the population is finding itself being burdened with high levels of debt both public and private. There being perhaps no better example of this than the level of debt that students are now being expected to take on. We are also seeing a rapid reduction in worker pensions, a reduction in the quality of social services, and an attack on the “luxury lives” of the public sector and union workers.

    None of these facts are in fact in dispute. What I’ve presented is by now an all too common laundry list of the poor economic outcomes that have been the direct result of the economic policies chosen by our leaders over the last thirty years. Stephen Gordon, and Stephen Harper for that matter, might well say in response, “Yes, well, things would have been a lot worse otherwise.” And there would be no shortage of expert commentators to echo this opinion. With our media right there to present their “fair and balanced” point-counterpoint.

    All of which perfectly exemplifies Alfred Bartlett’s famous pith, “For every Ph.D. there is an equal and opposite Ph.D.”

    It is at this point that most Canadians who got this far in the debate, and most don’t, throw their hands up in despair at yet another “He said, She said.”

    This despite the fact that – of course – most of us live in the bottom four quintiles. 80 being larger than 20 and all. It is amazing really that one can even talk about “the bottom four quintiles” in a democracy without getting laughed out of the room. Instead this is a highly respectable and well paid way to talk about, well, pretty much the whole of the country be it here or south of the border.

    Meanwhile the Canadian government is choosing policy after policy that cuts the taxes of those who pay the most taxes. Aka. The wealthiest among us. Adding billions to the our largest ever deficit, tens of billions to the national debt, and sorely stressing the services that the bottom 80 are truly dependent on. I don’t know about you but when I find myself with a cash flow problem I don’t tell the people who are in the best position to keep paying me that they can start paying less. Which is precisely the case with income splitting and corporate tax cuts.

    I don’t know what’s more odd. That the Conservatives are running on the basis of being the best managers of the economy or that this is the general consensus. Yes their policies are best from a certain self-interested point of view of a few, factually the case. But its passing strange in a democracy to see so many of the “bottom eighty” in agreement with the Conservatives self-opinion.

    At the same time military spending is at the highest levels since WWII and climbing. Billions more are being spent by every level of government on police, surveillance, and prisons. Again irrespective of the facts. In this case the fact of the matter being that crime was in decline before this splurge and so as a taxpayer one would have expected a break as oppose to a rapidly rising burden. No such luck. Instead like the much proclaimed “peace dividend” after the fall of the Soviet Union the directional arrow seems stuck for our ships of state when it comes to such expenditures.

    What is instead to be sacrificed are what the Americans call “entitlements”, what Canadians say defines them, and “luxuries” like pensions and wages. Be they public or private sector.

    Economics is quite obviously not a science in the sense of physics or chemistry. This does not however mean that a few verities cannot be divined. E.g. When you are trying to pay off your debts maintain your cash flow if you can’t increase it, and don’t spend money on things you can’t afford. E.g. High tech-gadgets which provide no revenue streams. By the same token when you are flush save for a rainy day.

    On both of these elementary economic tests of fiscal conservatism ‘The Harper Government’ fails. The question of why this is not only not the received wisdom about this government but very much the opposite is a question for another time.

  2. I’m not sure it’s fair to characterize Stephen Gordon as “conservative”. On the one hand he thinks the CIT is a useless tax, the GST should be raised, and minimum wages don’t alleviate poverty. For someone tacking leftward these positions not only go against your instincts, but sound downright cruel.

    On the other hand, and correct me if I’m wrong, he’s in favour of raising income tax rates at the upper end, heavily increasing transfers to the poor to counter sales taxes, and replacing the minimum wage with a guaranteed annual income.

    Anyway, I very much appreciated Armine’s rebuttal. I’ve been waiting for someone from the CCPA to enter into debate with the WCI crew.

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