A tale of two tax cuts

Stephen Gordon explains why it’s pointless to talk about raising corporate income taxes

by Stephen Gordon

Stephen Harper’s government has implemented two major tax cuts: the reduction of the GST rate from 7 per cent to 5 per cent, and the reduction of the corporate income tax (CIT) rate from 21 per cent (plus surtax where applicable) to 15 per cent (with no surtax). The reduction in the CIT rate was the continuation of a trend that had begun under the Chrétien-Martin years.

I—and Macleans’ Paul  Wells (among others)—have pointed out several times that these tax cuts have reduced federal tax revenues as a share of GDP to levels lower than they’ve been in at least 50 years. So far, the only tax cut that anyone has talked about reversing is the one to the CIT. Both the NDP and the Liberals promised to increase corporate taxes in 2011, and it seems likely that the NDP will do so again in the next campaign. Neither party has showed much interest in reversing the GST cut.

The politics of talking about corporate taxes are obviously attractive—corporations don’t vote. But it turns out that there’s little reason to think that increasing corporate tax rates will generate significant new revenues. The raw correlation between CIT rates and CIT revenues as a share of GDP is essentially zero, if not slightly negative.

The chart to the right (click on the image for a larger version in a new window) traces the evolution of federal CIT rates (the horizontal axis) and CIT revenues as a share of GDP (the vertical axis) since 1981. Even though federal corporate tax rates are less than half what they were 30 years ago, there is no discernible downward trend in corporate tax revenues. (Data sources are the Fiscal Reference Tables and the OECD Tax Database.)

As I noted earlier, firms can and will react to higher corporate tax rates by reporting lower corporate incomes by shifting revenue to other jurisdictions or by simply cutting back on investment and output in Canada. I worked through the implications of a simple model based on estimates from this study by Bev Dahlby and Ergete Ferede in a recent WCI post. One of the cases considered was increasing the statutory CIT rate to 21 per cent, the level it had been when the Conservatives came to power:

 

Revenue changes: Increase federal CIT rate from 15% to 21%
Year Base case Weak response Strong response Static case
Fed Prov Fed Prov Fed Prov Fed Prov
1 $9.4b -$2.5b $10.4b -$1.9b $8.4b -$3.0b $14.0b 0
2 $6.8b -$3.8b $8.6b -$2.8b $4.9b -$4.8b $14.0b 0
3 $5.3b -$4.6b $7.7b -$3.3b $2.7b -$6.0b $14.0b 0
4 $4.4b -$5.1b $7.3b -$3.6b $1.2b -$6.8b $14.0b 0
4-year sum $25.9b -$15.9b $34.0b -$11.6b $17.1b -$20.6b $56.0b 0
Long term $3.2b -$5.7b $6.8b -$3.8b -$1.8b -$8.3b $14.0b 0

 

The base case scenario use the main Dahlby-Ferede estimates, which include dynamic effects: firms adjust over time to the new tax rates. Annual revenues in the long term are one-third of what they were in the first year, and less than a quarter of what static analysis (that is, assuming no behavioural response) predicts. As Kevin Milligan put it on Twitter:

Another thing to consider is the effect on provincial revenues: the federal and provincial CIT rates are applied to a common corporate income tax base. Even if provincial rates stay the same, an increase in the federal rate will shrink the tax base and reduce provincial CIT revenues. Four years after the increase, lost provincial revenues will more than offset any gains at the federal level.

If your goal is to increase revenues, hiking corporate taxes is probably the worst available choice (see also here): significant reductions in investment and wages in return for little in the way of new revenue. There are some efforts being made at the international level to coordinate efforts to make it harder for firms to shift income for tax purposes, and these are worth pursuing. But this is a long-term project, and not likely to bear fruit soon.

The GST cut is (so far) the Harper government’s signature legacy for future governments. Here is what happened to GST revenues during the Harper years (data source is the Fiscal Reference Tables):

[Vertical scale is the same as in the other chart]

There are many reasons why economists sing the praises of the GST, and one of them is that it generates a steady stream of revenues. As a share of GDP, GST revenues are now running about 0.65 per cent below what they were before the Conservatives took power in the neighbourhood of $12b per year.

A political party that wants to reverse the course that the Conservative government has established for the path of federal revenues won’t be able to do it by reversing the cuts to corporate income taxes. As long as the GST cut remains unchallenged, Harper’s fiscal legacy looks secure.




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A tale of two tax cuts

  1. “I—and Macleans’ Paul Wells (among others)—have pointed out several times that these tax cuts have reduced federal tax revenues as a share of GDP to levels lower than they’ve been in at least 50 years.”

    What unites you two, and many others, is that you are union people totally dependent on productive people for your salary. And I don’t know about Wells but I bet Prof Gordon is like many other social scientists, people who think they are brilliant and underpaid, so they whine a lot when they think Feds will have less money and their magnificence won’t be suitably rewarded. Prof Gordon, if you are worried about Fed finances, quit your job, join the productive sector and lessen the burden on the rest of us.

    • Project much?

      • I am not a social scientist so I wouldn’t know.

        • im pretty sure they have already proven lower corporate taxes generates more economic activity through direct spending than taxes bring in

          • “They” isn’t exactly an authority, none I know of .

      • A lot actually. Better watch it or he’ll quote some PJ at you and that’ll fix you.

    • Part of why this country can’t compete, and I go offshore to invest is that this country is just too tax greedy. Companies pay lots of taxes, city, utility, provincial, federal, employment, GST all above the 15%. Then when it gets to the taxpayers wallet its taxed compounded again.

      A near majority of Canada is a nation of tax greedy losers. We need less government, less debt and less destruction of wealth by a unaccountable corrupt Ottawa that can’t even fire Senators embezzling via expense reports and offshore accounts. Ozawa, corrupt to the core. Maybe producers should unionize and toss governemtn out of work until they fix their greed and waste.

      • If you are so productive and don’t think your country is worth investing in, please feel free to leave and go to what ever country you think will suit your selfishness.
        You don’t invest here but like the services that the country provides.. hmmm and that doesn’t make you a “tax greedy” parasite hey?

  2. “The politics of talking about corporate taxes are obviously attractive – corporations don’t vote.”

    Why would corporations, let’s say Barrick Resources for example, need to vote if they can just meet with the Prime Minister’s Chief of Staff whenever they are having an issue?

  3. Stats Can – Total Revenue for 2005 $212,244 and total revenue for 2013 was $256,000 (in millions).

    http://www.fin.gc.ca/afr-rfa/2013/report-rapport-eng.asp

    Laffer Curve -” …. the Laffer Curve itself simply illustrates the tradeoff between tax rates and the total tax revenues actually collected by the government ….. The economic effect recognizes the positive impact that lower tax rates have on work, output, and employment, which provide incentives to increase these activities. By contrast, raising tax rates penalizes people for engaging in these activities. The Laffer Curve demonstrates what happens when the economic and arithmetic effects collide, explaining why a tax increase may reduce taxed activity and raise less revenue than otherwise predicted, just as a tax cut may increase taxed activity and raise more revenue than otherwise predicted.”

    http://www.laffercenter.com/the-laffer-center-2/the-laffer-curve/

    • Did you have a point? This is a fairly obvious consequence of basic economics.

      • “Did you have a point?”

        pj o’rourke – microeconomics is about money you don’t have, and macroeconomics is about money the government is out of.

        • Pj, the well known economist you mean, or PJ that well known humorist ?

      • Laffer Curve is a joke.

        • Please expand. The idea itself is not wrong. The way that it is interpreted/applied is a joke. Some conservatives disingenuously use it to argue that reducing taxes leads to an increase in revenue, which for any non-confiscatory level of taxation (read: much higher than in most any industrialized country) is not the case.

          • The Laffer Curve is a joke for the way it’s been interpreted over the past 30 years, as you explain above. (Which is actually what Gordon is referencing to when he says reversing tax cuts won’t yield any increase in tax revenues.) But it also doesn’t take into account the effect of punitive measures for tax cheating.

            Al Capone couldn’t be touched on any organized crime charges although he was a crime boss. But they eventually got him for not paying his taxes. (11 year sentence.)

            After 30 years of deregulation, governments have relaxed penalties for tax cheats (if only very wealthy ones.) That plays a significant factor in trying to measure the hypothesized effect. So the Laffer Curve is simplistic, incomplete and unscientific.

          • Ron, please provide a specific statutory or legislative example of a government in Canada relaxing penalties for tax cheats during the last 30 years.

          • Thank you for that. It amazes me that people consciously ignore this clean, simple fact.

          • “which for any non-confiscatory level of taxation (read: much higher than in most any industrialized country) is not the case”

            That’s false. The corporate tax rate is non-confiscatory yet you can see the increase in revenue (dotted line) when going from 38% to 16% corporate tax rate. The chart provided by Gordon is a perfect example showing that you are wrong.

          • I guess I should have been more clear. Most often, the Laffer curve is used to justify cuts in personal income or consumption taxes. I agree that the evidence doesn’t support the notion that increases in CIT rates yield much revenue. This is because capital is quite mobile and Canada is a small slice of the world capital markets.

          • There is a lot more to it than that.

            Regardless, the Laffer curve exists at all levels of taxation, on all forms of taxation, and the mobility of earnings and capital is just one of many reasons. Other reasons include increased disincentive to work, inability to earn sufficient after-tax income to justify the expenses in time and money, more opportunities for sheltering income (the cost of not sheltering is higher which increases avenues for sheltering), increased use of accountants to shelter income, reducing income by increasing expenditures to generate income elsewhere, shifting income to other individuals, etc etc etc

          • The mechanisms aren’t really very important to the concept.

          • What a silly thing to say. The mechanisms tell you everything, such as when the concept applies and when it does not.

          • On the contrary, models never accurately account for the complexity of human behavior. They don’t need to either.

          • So you’re throwing evidence-based policy out the window. I guess only conservatives are interested in evidence.

          • No. Models are only useful if they accurately predict behaviour. What matters is that the evidence shows that the phenomenon behaves as if the model were true, not that the model itself is an accurate reflection of the complexity of the system. Models need to make simplifying assumptions in order to be useable.

          • …because there is only 1 variable (CTI rate) at play when talking about CTI revenue? the (real) world ain’t that simple.

          • Well of course- 38% is clearly confiscatory. However, dropping the rate from 16% to 8% would NOT get the identical result as pretty much every “conservative” (read: radical partisan idiot, present company definitely excepted, scf) believes.

          • First of all, you don’t know that going from 16 to 8 would be different. In fact, you incorrectly believed only high rates showed the curve when in fact rates as low as 16% show the curve. Show you’re just blowing smoke. Since rates above 16% do not increase revenue, there is a rate somewhere below 16% which is the first rate at which increased that rate no longer produces increased tax revenue. We know it’s below 16% by the chart, and you have absolutely no idea where it is, yet you claim to know what you are talking about.
            Secondly, what you are saying about conservatives is an exaggerated myth. It’s called a “curve” for a reason. Nobody except liberal idiots think that most conservatives don’t know what a curve looks like. A curve is a curve is a curve.
            Your portrayal of conservatives is a liberal myth. Not once, ever, anywhere, anyhow, have I ever seen/read/heard a conservative make the claim you are attributing to them. Yet at the same time, here you are making an obviously false statement about the location of the curve’s peak, when the evidence is showing that lowering the rate even further from 16% will continue to produce the same tax revenues.

          • We should take the tax rate to zero- revenues would SOAR!

            Sorry pal, but I’ve got a job to do and just don’t have the time you seem to have to engage in long, drawn out ideological discussions.

            Being productive and all has its drawbacks.
            :)

          • Once again, you fail to grasp the concept of a “curve”. I guess it’s too difficult for you.

          • No I don’t. Can you repeat the argument again please?

          • This is what a curve looks like:
            http://i.investopedia.com/inv/dictionary/terms/laffercurve.gif
            It’s got two ends, and it’s roundish. For the Laffer curve, one end is at 0, the other is at 100. The end at 0 has value 0. The end at 100 has value 0. Got it? Even a liberal like you might understand if you try hard enough.

          • Heh heh….I win.

          • Win what?

          • AH nothing- just yanking your chain. :)

            Happy Christmas.

          • Yeah but you cheated. You used a paragraph more than a single line long. You know he can’t read that far.

    • Oh come on Tony. At the current rates of taxation, the Laffer curve is useless to Canada (and the United States for that matter).

      • On the contrary, there is no better example of the Laffer curve than that chart.

        • I’ll grant you this is accurate.. because even though the chart shows us exactly nothing..(29% should give you a clue as to it’s meaninglessness) there is no better example.

  4. Nominal corporate tax rates are meaningless. KPGM produces a guide for international businesses called Competitive Alternatives. According to them, Canada has the LOWEST effective corporate tax rate among ALL major economies:

    “Corporate income taxes are lowest in Canada (7.3 per cent effective corporate income tax rate), France (14.7 per cent), and China (14.8 per cent). At the other end of the scale, effective corporate income taxes exceed 30 per cent in Japan (31.5 per cent), Brazil (36.1 per cent), and Italy (37.6 per cent).

    “These effective income tax rates are significantly lower than the nominal tax rates in most countries due to the inclusion of various tax incentives, including R&D tax incentives, in these calculations.”

    Interesting how neo-cons say if reckless tax cuts are reversed, businesses and rich people simply won’t pay them. That would mean they are paying whatever level of tax they want regardless of the tax rate. So why are tax cuts necessary if businesses are paying the rate of tax they choose? Why don’t business just choose to pay no tax at all?

    First free-market ideologues say trickle-down tax cuts will boost productivity and create wealth and jobs. When that scheme crashes and burns, they come up with lame excuses for why the failed policy can’t be reversed.

    It’s all a self-serving con job, which is why it has done such a number on the economy.

    KPMG Competive Alternatives 2012 — Focus on Tax (Chp 3, pg 7)
    http://www.competitivealternatives.com/reports/2012_compalt_report_tax_en.pdf#page=9

    • So Ron, I take it that you’re not in favour of increasing the GST rate?

      • Given Canada has one of the lowest VATs in the developed world, it would be smart to raise it a few points. Given Canada has the absolute lowest corporate tax rate among ALL MAJOR economies, it would be smart to reverse Harper’s pointless and reckless tax cuts.

        Harper has made a huge mess of the tax code with frivolous and ineffective tax cuts: $44.4B/yr in total. The Liberals would be smart to restructure the tax code and with the savings cut income taxes and raise social spending (we rank #23 of 31 OECD developed countries) and invest in crumbling infrastructure.

        Also there are a number of articles pointing out how the richest people pay the lowest tax rate. This is obvious foolishness. Even Adam Smith favored progressive taxation (regressive taxation is insane.)

        It’s also ridiculous that Canada has no inheritance tax. What conservatives can’t seem to fathom is that if someone is freeloading tax breaks someone else is pulling their weight. It’s ridiculous to dole out free-money to the wealthiest Canadians and have everyone else pay for it. Canada should be a meritocracy, not an aristocracy.

        • So Ron, while I agree with you that the GST should be raised, please advise me as to which of the federal political parties is proposing to raise the GST. I can’t seem to think of one, can you?

          • No political party ever campaigned on raising taxes. But at some point in time, most of the reckless tax cuts put in place over the past 30 years will have to be reversed. Like in the *successful* post-war Keynesian era, it will just happen.

            But tell me this? Are neo-con economists like Stephen Gordon who advocate the ethically-bankrupt strategy of “starving the beast” more principled than politicians who won’t run on raising taxes?

          • I thought that what Mr. Gordon was pointing out via his post above was that the GST is a superior revenue-raiser than corporate taxes. So he’s not advocating “starving the beast” at all; what he’s arguing is that there’s a good, efficient way to feed the beast (GST), and a far less good, less efficient, less rational way (corporate income taxes). And on that count, I am in agreement with him, and I understand that that is the consensus view among tax policy experts and economists, i.e., that consumption taxes are the best taxes, both in terms of their efficiency at raising large amounts of revenue, and in terms of their transparency (i.e., you know you are being taxed, they’re not hidden).
            All of which is to say that your question is utterly misdirected and, once again, you’re barking up the wrong tree.

          • “and I understand that that is the consensus view among tax policy experts and economists, i.e., that consumption taxes are the best taxes”

            I love it when neo-cons say all economists agree with their position. It’s a load of crap.

            You can google Gordon and “starving the beast.” He wrote two blogs about it…

          • So Ron, you don’t think that consumption taxes, of all the tax alternatives out there, are the best and most efficient taxes, for the reasons noted above? Does that mean that those Scandinavian countries are all complete idiots then? You know, the countries with the highest VATs on the planet?
            And by the way, you get today’s straw man construction award, for labelling anyone who seems to disagree with your position a “neo con.” I guess this means that the architects of Scandinavian tax policies are all neo-cons, right Ron?

          • Ron, I don’t think Gordon is advocating any particular policy on fiscal policy. He’s commented on the fact that it seems the CPC’s strategy is to starve the beast. On the other hand, they’ve made a bit of a hash of reducing the size of government, given that they ramped up spending faster than the Liberals before them.

          • I defy you to identify anything in those 2 posts – or this one – that implies that I approve or disapprove of the trend.

          • I’m impressed that your post has you labeled both as a union lackey who loves big government, and a neo-conservative who wants to starve the government. You must be so confused …

  5. NDP are totally stupid and obvious they don’t invest in Canada. Corporations are taxed in many ways including employment taxes, city, property, utility, GST taxes and provide jobs that are heavily taxed. So much tax greed….and it is just statism-corrupt GREED.

    Then when a brutalized Canadian investing in Canada gets the pathetic returns, they are TAXED again!!!! Greed doesn’t end at corporate hidden taxes that are not in the 15%, no, go at the investor like a rabid dog and compound tax’em more.

    Now you know why in the last two years I have largely given up investing in Canada. I go offshore where taxes are less and earnings are a far lot lot better on average. Let the socialists eat unemployment, it tends to bring reality back to the greedy.

  6. One could argue if you tax the crap out of the investors and company owners, why double tax companies owners? Wage earners are not double taxed so why double tax investers who provide JOBS of value to people. We all can not work for government or nothing productive will get done and we would starve talking a lot.

    But taxes hidden and real are why this country can not compete, too tax greedy.

    • That’s ridiculous. Canada ranks #9 of 31 high-income OECD countries in tax revenues as a percentage of GDP.

    • Jobs? What jobs?
      All the cash from those tax cuts was stashed off-shore by the so-called job creators. More full-time jobs were lost and the only jobs that became available were low paid, part time work. Then there was a need for government subsidy for training new workers and attracting business here; so welfare for those who had already received tax cuts making them amongst the lowest taxed in the world.
      Add to that the free trade deals that allow companies to import workers at lower rates than people here to take away Canadian jobs and I think your whining is totally unfounded.
      You seem to have a real problem that Canadian jobs should go to Canadians and companies working in Canada should pay their workers a living wage. Bu then from someone who doesn’t want to pay taxes yet still uses government funded services and resources that is hardly surprising.
      Classic right wing charity case.

  7. So from the discussion above, we can conclude:

    1) Corporations will fork out untold billions of extra dollars in taxes if you express your hatred of corporations strongly enough, and

    2) No-one wants to touch the GST.

    Looks like Stephen Harper has already won the next election, regardless of who forms the government.

    • It’s not surprising you would come to such a ridiculous conclusion.

      You may believe your own BS that reversing corporate tax cuts will not recover any of the $14 billion a year in lost revenues. But that certainly doesn’t make it a scientific fact. Far from it.

      People like you were saying these tax cuts would increase productivity, boost GDP growth, create jobs, make Canada more competitive. What happened? Productivity growth is at all time lows. GDP growth is anemic. Job creation barely keeps up with population growth. We went from a 2% GDP trade (current account) surplus to a 3% trade deficit, putting us at the bottom of the G7. All the while corporations pocketed the free money rather than investing it.

      Of course, you’re an economist. So you have zero accountability. You can cook up as many flaky hypotheses as you want without worry of having to answer for being completely wrong. You can even falsify data like Reinhart and Rogoff without repercussions, even though if they had been journalists, scientists or academics in any other field their careers would be toast.

      It’s laughable you think you are principled and politicians are not because they won’t run on raising the GST. Too many economists live in their own little worlds as ridiculous as their Aristotelian economic models.

      • Strike me down with all of your hatred and your journey towards the dark side will be complete!

        • You probably think Luke Skywalker was fighting for free-market values: plutocracy, unfettered selfishness, insatiable greed, social Darwinism, etc… Hate to spoil it for you, but Darth Vader was a neo-con…

          • “Darth Vader was a neo-con…”
            Why am I not surprised that you would actually think that . . .

          • No doubt neo-cons have quite a different impression of good and evil than the average person…

          • In your black-and-white partisan mind, that is the case.

          • LOL

          • Oh my….you can sure tell the discussion has really deteriorated when it turns to whether Darth Vader was a neo-con.

      • Hi Ron,

        On his side, SG has logic and a lot of evidence that corporations, when faced with higher rates, sharpen their pencils and implement tax strategies to lower their burden. These folks have access to the very best tax advice. Do you think they will ignore that advice and just cut a big fat cheque to the CRA?

        On your side, you have a lot of passion and a hope, I presume sincerely held and heartfelt, that corporations will not respond in the ways that logic and evidence suggest they will. Am I missing something?

        • What logic and evidence? You have studies showing that if corporate tax cuts are reversed the corporations will simply refuse to pay them?

          When faced with higher rates compared to whom? According to KPGM, Canada has THE lowest effective corporate tax rate among ALL major economies — including China.

          I think your “logic and evidence” is complete BS.

          The fact is corporations are in the business of cutting costs. Corp execs who effect these get big fat bonuses. Share value goes up.

          So your “logic and evidence” that corporations will only look to cut tax costs if their tax cuts are reversed is complete nonsense. You think businessmen are saying to themselves: “Well we only pay a 7.3% tax rate so out of the kindness of hearts we won’t look to sharpen our pencils and implement tax strategies to lower our burden?” BS! Corporations will look to lower their tax burden if they are paying a fraction of a percent in taxes.

          You, sir, have no logic and have no evidence. And that’s why the field of economics can only be described as pre-Copernican. Economists choose to believe the Sun revolves around the Earth because it advances a particular *political* agenda.

          • Ron, you are making NO sense. First of all, the fact that Canada has low corporate rates compared to major OECD jurisdictions doesn’t mean corporations have no incentive to shift tax burdens via jurisdiction shopping and no ability to do so. Have you ever heard of these things called “Tax havens” and “low-tax jurisdictions”? Bermuda, BVI, Caymans, Channel Islands, Luxembourg, Netherlands Antilles, the list goes on and on and on. A great deal of tax avoidance and arbitrage involves using vehicles legally situated in places like those. So you’re making the wrong comparison and barking up the wrong tree. If I’m a corporate executive and you jack the corporate rate by 5%, my first inquiry is not going to be whether this or that OECD country has a lower rate — my inquiry is going to be “can I do some restructuring to get an effective lower rate?” And as long as there are tax havens and (mostly non-OECD) low-tax jurisdictions out there, the answer is probably yes. And the more you jack the corporate rate, the larger the incentive you will create for that kind of avoidance arbitrage.

          • More excuse-o-nomics BS. Corporations are going to anything and everything they can to pay the lowest effective tax rate — NO MATTER WHAT.

            Neo-cons are sure griping enough about the possibility of corporate tax cuts being reversed. The more talking they do shows the more worried they are. If they believed their own BS, they wouldn’t care. But they sense the gravy train is coming to a stop so they are amping up the lame rhetoric.

            Perhaps they can fool the right people into believing their self-serving ideology is actually evidence-based policy. That is, after all, what brought about the 2008 global economic meltdown and all the economic problems we face today…

          • Ron, Mr. Gordon’s post is a discussion of tax ALTERNATIVES, one being corporate income tax, the other being GST/VAT. You seem to be seeing it as some sort of isolated endorsement of low corporate income tax rates, devoid of any comparative context. Look, if there were no other policy alternative, and corporate income taxes were our only means of raising revenue, AND we needed to raise more revenue, then I’d agree with you, we would have to raise corporate income tax rates.
            But that’s not the planet we’re living on. We’re living on a planet where there are several different alternatives for taxing and raising revenue. That’s a big part of what tax policy is all about — figuring out the mix, i.e., the mix of consumption vs. personal income vs. corporate income vs. capital gains and so on.
            Once again, the point of the discussion was comparing the merits of raising one tax rate (GST) versus another (corporate income). But you seem strangely, rabidly intent on making this a discussion devoid of that context.
            How can somebody be a “neo con” while advocating raising consumption taxes? All I can conclude is that you have some rabid partisan compulsion to go on some anti-neo con rant, rather than having a rational discussion about tax policy.

          • Yes they will lower their effective tax rate as much as they can – as I assume you do with charitable donations, RRSPs, TFSAs, and other tax incentives (such as the ones on your TD1 form).
            However, there are costs to using these various mechanisms, from legal/accountant fees to restrictions on that for which the various ‘pots’ of money can be used. I would imagine that as you increase the CIT rate, eventually the benefits of seeking the arbitrage/incentive outweigh the costs in doing so and so are taken – to the benefit of the payer and the detriment of the government. for example, if the costs of moving profits offshore are 12% plus increasingly significant loss of social licence as profits are ‘offshored’, then if the CIT is 15%, it only makes sense to ‘avoid’ domestic taxes if the combined haven tax and social licence cost are less than 3% – a narrow window. However, a CIT of 30% (which does not seem to yield significantly more, perhaps less revenue in a relative sense) leaves a window of 18% – a much larger one in which the loss of social licence may be preferable to a much greater extent of ‘lost’ domestic profits. It might be worth it to send half the profits overseas – if so, the government take is the same, but only half the amount of profits stay in Canada, thus investments in Canada are lower for no gain to the government, a smaller investment pool, and a less ‘socially licenced’ corporate sector. I am not necessarily advocating lower CITs just fair and more nuanced discussion than the ‘corporations are evil’ tone.

      • Let me guess…you’re one of those guys that hates the Conservatives because they reject the wisdom of “experts”.

        • Zing!

          • You’re certainly digging down to the bottom of the barrel… Interesting how conservatives, being dominated by their lizard brains (amygdalas,) perceive criticism to be a threat and therefore “hatred.” Yet, these same people often attack their opponents with slander and sleaze and have an actual visceral hatred of the other side. Just take a look at the kind on attacks the Cons run against their political enemies…

          • Where is it that you are going to store all of these straw men that you are constructing? Better rent a tuff shed.

      • Ron,
        Falsifying data is wrong in any field. But as to journalists, scientists and academics, why does the world still seem to put stock in what comes from the IPCC despite its reported foibles from skewed predictions v. reality to the East Anglia email scandal?
        As to the macroeconomic indicators, you of course have access to what would have happened had the world proceeded as it did except for the CIT and GST cuts. That is where you are getting your 14B figure, and not based on some linear projection of revenues into the present from past tax rates, right?
        And in uncertain times, you never try to increase your cash reserves and reduce your net debts? Why ought corporations do differently – and leave themselves more highly leveraged and prone to collapse which would eliminate jobs rather than not add any.
        And an export-reduction-driven change in our balance of trade can’t have any effect on profits of our many export driven industries and the taxes and reserves they need?
        As productivity growth is roughly the change in GDP/hour worked, the only ways to increase it are some combination of faster GDP growth and lower hours worked growth. The latter would mean slower or negative jobs growth; hardly desirable, while the latter would need, roughly, an increase in the velocity of money or its supply. Low rates would seem to indicate the latter is being tried with, apparently, little success. However, how can you make money circulate faster? Collecting less CIT allows more profits to hike wages, control prices, reward investors or increase inventory. Less GST would mean less money sitting waiting to be remitted, more consumer spending or saving, and a shift of the demand curve likely to an equilibrium price point with greater profit and efficiency potential on the marginal cost curve.

      • Is it a lack of self-awareness that makes you write posts where you come off as a hateful, spiteful, resentful little man who thinks he knows everything? Or are you actually a hateful, spiteful, resentful little man who thinks he knows everything? You don’t need to answer that if you don’t want to. It was more of a rhetorical question anyway.

    • Sounds like Robert Borden won the last 20 elections in Canada – the temporary income tax was never repealed.

      But that doesn’t jibe with the fact that Pearson won the last 10 elections… the medicare system has remained unchanged as well, despite its poor ranking in the OECD’s comparison of medical systems in OECD countries.

      So I guess Borden, Pearson, Harper and others have all won the next election.

    • Why are you not demanding Harper put the GST up? He poisoned the well for the opposition parties running on raising it. He should be the one taking the political hit.

      • To be fair i think he’s put the challenge out there to the opposition parties a number of times, but they aren’t biting. It’s hard not to conclude Harper hasn’t got them buffaloed – but it bafffles me why an evidenced party[such as Jt says he wants] isn’t rolling out some big guns on this. Perhaps Mr G will enlighten us?

      • That comment is bizarre. You want politicians to escape accountability because people don’t want to buy what they’re selling, and you think this is a good suggestion. By the same token, you think you can force politicians into doing something that they do not want, nor do the people want it, and you think this is a good suggestion.
        You appear to have no understanding of democracy.

      • Reducing the size of the federal govt is part of Harper’s agenda. As far as the Conservatives are concerned, cutting the GST is not a mistake that needs correcting.

  8. Once again, I suggest we eliminate corporate taxes entirely, and replace that lost revenue with higher taxes on capital gains and investment income.

    I would go further and suggest that the initial tax rate on investment income and capital gains be 98%, but that rate declines at two percentage points per month that the investment is held, until it reaches some base level, thus encouraging people to actually invest, and not just seek arbitrage opportunities.

    When that’s done, we then apply the original intent of the green shift, lowering income taxes and increasing GST or carbon taxes to match the revenue lost, with appropriate *monthly* rebates being provided to keep people in dire situations from being wiped out by the increased consumption taxes.

    • You want to prevent people from having any access to their own invested money for any reason by taxing them at 98%….

      …and in the same comment you later say “to keep people in dire situations from being wiped out”

      Talk about cognitive dissonance.

      • Jesus, if you can’t read more than a line and a half in a paragraph, do us all a favor and shut the hell up before thinking you have anything to say that doesn’t make you look like a complete idiot.

        • More cognitive dissonance. Thanks for the exclamation point.

          Here’s a tip: when you’re in a hole, stop digging (and swearing).

  9. Your chart is a nice illustration of the Laffer curve in action. The government has just as much revenue with a 16% rate as a 38% rate. Meanwhile, corporations (and their employees) can do more with their earnings, raising wages, paying dividends, or reinvesting into the business.

    • Correct. It’s all Laffer curve “voodoo economics.” Bungling macro for over 30 years!!

  10. That was fun. 60 odd posts in and we’ve had SG called a entittled social scientist and, i think, a neo con guy with an attitude, asthma, and a nasty habit of strangling people with his mind.
    But as of yet no actual speculation on just why two essentially progresssive parties will not consider the obvious upsides of increasing the gst[ the fact that the ndp will go to the mat for a price on carbon, but not a hike in gst is mindboggling] …For the love of god, why not??? Beyond the obvious, they’re too chicken of course. You aren’t coyly suggesting they think SH was right to lower that tax – i feel safe in assuming. Is there a sound economic reason please? Or is it all in their heads?

    • No bites yet eh. You’re sleeping I suppose. I thought Darth didn’t sleep, he just took his helmet off for a bit and surfed the force.
      Anyway I think I may have answered it myself. Both parties are planning to run with a price on carbon of one sort or another. Is it possible they’ve concluded the economy couldn’t handle the shock of two principle taxes going up, ? certainly difficult politically.
      Still, the NDP seem determined to stick to raising cits. So much for the rational then.

      • The Liberal Party of Canada turned the GST into absolute political poison from the moment that the Mulroney government first brought it in. Essentially, in the minds of Canadian voters, nothing has changed since then. And on top of that, what happened in BC with the HST doesn’t exactly motivate your average politician to think that increased or enhanced consumption taxes are politically wise or attractive. The situation sucks, but unfortunately, for those of us who see the merits of consumption taxes, we just don’t have much of a tradition in North America of having vigorous consumption taxes as part of the tax mix. And it doesn’t help matters that we have as a neighbour a country with no national sales tax, and we have a major Canadian province with no provincial sales tax.

        • I’m not disagreeing with you but i seriously doubt many voters can recall who was for who agin GST 20 years ago.
          Still some poisons are slow and long lasting so you have a point.[And it is another reason for us to mock those who choose short term gain from politics over good policy no matter where it comes from]
          But[ as a Liberal partisan]i have to point out Chretien then stuck with the gst[and free trade]which in my mind is more forgivable then SH’s choice. Bearing in mind of course the damage to general credibility of politicians and the rise in cynicism brought about by Chretien’s tactics. So, maybe it’s a wash?
          I can’t wait for the day Canadian politicians in general eschew short term gain for the longer one. Now there’s a naive hope if ever there was one. Guess i’m asking if we will ever get our own Mandela?

        • People don’t like sales taxes for the same reason leftist politicians like them. They transfer a lot of money from the people to the government.

          • Hmmm, if you’re saying or implying that only “leftist politicians” like consumption taxes, I have to disagree with you. Plenty of tax policy experts who are very far from left-wing argue that consumption taxes are the most superior and efficient mode of taxation.
            One of the main arguments in favour of consumption taxes is actually what you might even call a “right wing” position, in the sense that the argument goes that consumption taxes make people acutely aware of (a) the fact that they are being taxed, and (b) the exact extent to which they are being taxed. Put simply, consumption taxes are visible, not hidden. And of course, that’s why they’re so politically unpopular. But among many policy experts, the argument continues that if you know that you’re being taxed and how much you’re being taxed, you will make much more rational and informed decisions about taxation and spending.
            What I consistently find is that a lot of left-wing people, and especially left-wing politicians and bureaucrats, love hidden taxes, less visible taxes and the like, because they would like it if people just passively paid lots and lots of tax and were blissfully unaware of it. One example is all of the taxes that get piled into a typical litre of gas at the pump. Another one is all of the stuff that gets piled into the price of an airline ticket in Canada. Of course, deductions at employer source are a classic example of it. Sure, the tax bite shows up on your pay slip, but a lot of people just look at the bottom line, and chuck the pay slip in a drawer.

          • I’m mostly saying
            a) politicians like consumption taxes because low rates of consumption taxes raise large amounts of revenue and
            b) leftist politicians like taxes in general more than rightist, hence the fact that Harper actually reduced the GST despite the large amounts of revenue that it brings in

            That is why European countries have such high rates of VAT – because it is the only way to bring in enough revenue to enable them to spend 50% of their countries’ total GDP.

            Consumption taxes are not inherently visible. Prior to the GST, the sales tax was in fact invisible.

            But you do seem to be aware of that, because you say so when you are talking about airline and gas taxes.

            Airline taxes are visible – you can see them all quite clearly. There was a bit of political activity around the fact that airlines used to advertise their pre-tax rates, which I think was changed by legislation, now they can only quote the full price in an advertisement. Funny enough, that makes the taxes less visible, because you are no longer shocked by the difference between the ad and what you pay, but it does make shopping easier.

            Meanwhile, income taxes are never invisible, as you say, because you simply need to look at your pay slip.

            There was actually a time in Canada, prior to the GST, I don’t know if your age allows you to remember, when sales taxes were totally invisible, that when you purchased something the list price included the tax and if I remember correctly, the receipt did not show the tax, so there was no way to know what the tax was, other than knowing the law.

  11. It seems exceptionally simplistic to reduce CIT revenue to the CIT rate. However, if the relationship between the CIT and CIT revenue is essentially 0 then claims that reducing the rate will increase CIT revenue are ridiculous. I mean if we reduce CIT revenue to the CIT rate then driving it to virtually 0 should put revenues through the roof. If only we had a 0.5% rate revenues would quintuple or more! But I’m sure I’ll never hear any neo-con, still clinging to the unscientific belief that people are rational, say if only we lower the corporate tax rate there will be economic growth and higher tax revenue. Because all economic activity is reducible to CIT and investment decisions, consumer confidence, etc. are all a function of CIT.

    • But Stephen Gordon isn’t claiming that reducing the corporate tax rate (at least at current levels) will increase corporate tax revenue, he’s challenging the claims made by two of the three major political parties that increasing corporate tax rates will increase corporate tax revenue – which claims are empirically doubtful.
      (in fact, his claim is that, at least within the range of corporate tax rates that Canada has had over the last few decades, corporate tax revenue stays more or less the same regardless of the tax rate).
      That’s an important observation, since those political parties are counting on the illusory increased revenue from their proposed corporate tax increases to fund their spending priorities. If that revenue doesn’t arise – and empirically there seems to be good reason for expecting that it won’t – that’s a problem for the credibility of those parties’ platforms.
      And no one is suggesting that all economic activity is reducible to the corporate income tax. But corporations are significant economic players, so it would be silly to think that that how you tax them won’t have a broader impact on the economy.

  12. Revenue from corp. is null? Well if you keep lowering it, and your dealing with people with enough money to have “Tax-nullification schemes” of course the money’s sluggish. We have more mining companies than anywhere else in the world and we’re an oil producer and theres no money in the piggy from billion/trillion dollar corporations?, the money is obviously finding its way out of our revenue streams, much of it wont ever see canada and is parked offshore by holding companies. Recently the offshore parked wealth is hovering around 20-32 trillion. Nothing will change however when you have elites going from Bay st to parliament hill and back again.

  13. What is rarely mentioned are the reasons WHY Governments today demand such a high toll from their citizens in the form of taxes.
    Someone has to pay for all the promises made in order for Political parties to form Governement.
    Better idea instead of raising taxes….lower the cost of Government. That however, won’t win votes…so don’t hold your breath.
    Anyone see the latest AG report about Ontario Power?
    The money wasted boggles the mind.

    • Meh. Just more proof that democracy leads inexorably to socialism. If people have a meaningful say in the governance of their lives, they will use that say to bring themselves up, perhaps at the expense of others.

      If democracy places the power in the hands of the majority, then so long as there is a majority of “have-nots”, their will shall trump that of the “haves”. The poor will take from the rich. This is the inevitable result of democracy, and those who would fight against socialism need to understand that their fight is against democracy.

      • From what I’ve heard of gas price subsidies in Iran and Venezuela and happy citizen things like that (even the level of consumer austerity in Nazi Germany was lax compared to the democracies) dictatorships spend even more in redistribution than democracies. Their people can only shoot them if they don’t like the government. Democracy is the only hope against socialism :p

        • Yes, it’s well known that cars are common among the poor in Iran and Venezuela.

          Care to try again?

          • Since I’m ridiculously nice, I’ll put it this way. Since those countries can’t afford to give them cars democracy is also socialism’s only hope.

  14. Instead of raising corporate tax rates, I would prefer to increase the tax rate on capital gains by individuals. It is wrong that capital gains are taxed at such a low rate relative to income from salaries. I understand, and accept, that gains from risky investments that increase the productive output of society should be encouraged by a lower tax rate but the existing difference to too great given the reality is that many capital gains are not generated from direct investments in productive activity (building factories, expanding businesses, etc) but rather from financial speculation. It is much easier to send corporate profits offshore than the (extremely) highly paid individuals who mostly gain from the low rate of capital gains.

    • Capital gains account for about 3% of all personal income. You’re not going to get much extra there. regardless of how you tax it.

      • How much personal income is there compared to corporate income, however? I mean, 3% of a couple billion still isn’t anything to sneeze at. And if (net) corporate income is less than the total national personal income, it may balance out to some degree. But then again, maybe our net corporate income.. aka, the CIT base.. is much larger than total personal income.

        Also, are you talking of capital gains as strictly capital gains? Because a lot of people, when they speak of capital gains, are also including investment income.

        No idea of Rhinanthus is, of course, but I thought I’d put that point out there.

        • In 2009. “Income taxes” were $153B. These were broken up into “Personal Income taxes”: $114B and “Corporation income taxes”: $31B.

          The top 5% of earners account for about 24% of all income. They don’t get their money in wages. They get most of it in capital gains, dividends and interest. So who knows what “context” Gordon claims capital gains taxes only comprise 3% of all income taxes.

          But I’m definitely going to do more research to see what the real numbers are…

          http://www5.statcan.gc.ca/cansim/a26

          • This is wrong. The concentration of income at the top has been driven by the increase in wage income. Interest income makes up a small and declining share of top-end incomes.

  15. I’d like to see a one percent increase in GST as a temporary ‘consequence’ of a deficit. Forget debt limits and the like – having an unpopular tax come in as a result of debt would be both smart and really effective.

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