The Corporate Tax Cut Myth
Apr 14, 2011
computer, creation, investment, job, myth
In a new report from the Canadian Centre for Policy Alternatives, David Macdonald examines corporate income tax cuts and their effects on the Canadian economy.
As we are in the midst of a federal election campaign, this is a topic of relevance as Conservative income tax cuts have become a defining issue separating them from the other parties. Not only have they slashed the corporate income tax rate from 21 percent in 2006 to 15 percent by 2012, but they have vowed to continue cutting corporate taxes if given another mandate.
At a time when Canada is emerging from a recession, corporate tax cuts are particularly costly. The government itself estimated that by 2011-12 the cuts from 2006 would be costing more than $10 million per year.
There remains great debate over whether these cuts are at all effective in creating jobs. The government’s own stimulus multipliers show that corporate income tax cuts are the least effective means at the government’s disposal of creating economic growth and jobs in the short term. Instead, social housing and infrastructure top the list, as these create about 10 times as many jobs per public dollar spent.
Yet the argument continues to be made - particularly by former Finance Minister Flaherty - that you can lower the tax rate on corporations and still take in more money because they will supposedly expand their activities and invest in their companies and thereby pay more tax. Unfortunately, history has shown this not to be the case at all. Companies do not spend this saved money on technology or employees. It goes into their bank accounts or their pockets or is used to pay off their debt.
To prove his case, Macdonald looked at some of Canada’s biggest companies and tracked how their tax bills, profits, and job creation has changed over the past decade.
And what did he find? These 200 or so companies now pay essentially half the corporate tax rate they paid as little as ten years ago. In terms of government revenue, had these companies paid in 2009 the same rates they paid in 2000, federal and provincial governments would have collected a whopping $12 billion a year in additional revenue. Yet these companies made 52 percent more profit in 2009 than they did in 2000.
So did corporate tax cuts stimulate job growth? From 2005 to 2010, the general Canadian employment rate grew by six percent. But the companies studied produced employment growth of only five percent over the exact same period. Despite massive tax savings, these companies did not even keep up with the amount of jobs created in the Canadian economy.
One cannot argue with Macdonald’s conclusion: “The only noticeable result from the decade-long corporate tax cut experiment is that Canada’s largest companies have larger profits.” The bargain that Canadian governments made to provide Canada’s largest companies with massive tax breaks in return for the promise of jobs and prosperity has not materialized.
Comments
Comments are now closed