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Corporate tax cut questions


 

The Globe questions the effects of corporate tax cuts.

But an analysis of Statistics Canada figures by The Globe and Mail reveals that the rate of investment in machinery and equipment has declined in lockstep with falling corporate tax rates over the past decade. At the same time, the analysis shows, businesses have added $83-billion to their cash reserves since the onset of the recession in 2008.

The Canadian Centre for Policy Alternatives has similar doubts.


 

Corporate tax cut questions

  1. Indeed. a small tax cut or increase will make very little difference in the grand scheme of the economy.

  2. Indeed. a small tax cut or increase will make very little difference in the grand scheme of the economy.

  3. Should I bother reading the links, or is the Globe trying to have us believe that the primary purpose of cutting taxes on corporate profits is to goose the company's investment in machinery and equipment?

    Because if they want me to swallow that premise, then I am done already.

  4. It's what businesses always do in Canada.

    It's why Mulroney gave up on the garment workers after free trade.

    They don't upgrade, they just show bigger profits.

  5. Should I bother reading the links, or is the Globe trying to have us believe that the primary purpose of cutting taxes on corporate profits is to goose the company's investment in machinery and equipment?

    Because if they want me to swallow that premise, then I am done already.

    • Join the club.

      Just go read Stephen Gordon blogs – he's quite explicit in that claim. To improve productivity.

      • How is produictivety improved if they keep the money in cash reserves? Does he explain that?

        • His view is that theory trumps facts.

    • Both the Tories and the Liberals are wading into a debate that has sharply divided economists. Business groups and conservative think tanks advocate lower taxes as a way to create jobs. Labour economists counter that lower taxes benefit only corporations and do little for the broader economy.

      But the reality is there are no easy answers when it comes to measuring the impact tax rates have on job creation. Economic growth in Canada can be attributed to a lot more than just corporate tax rates. Such things as commodity prices and the value of the Canadian dollar also play a role.

      The issue boils down to this: At a time when Ottawa and many provinces are awash in deficit, should governments invest scarce resources in making life more affordable for families by enhancing social programs or in giving corporations additional tax cuts?" Globe/Mail

      What Howlett left completely out of her article was any discussion of how well Canadian economy did during the past few years compared to just about anywhere else in world. So investment might not be increasing as much as we would like, many other economic numbers were quite good comparatively.

      Also, isn't labour economist an oxymoron?

      And all the jobs and wealth corporations create help the 'broader economy' a wee bit, surely.

      • Probably not discussed because it isn't true.

    • I had a longer reply, but the censor bot has apparently swallowed it – temporarily or permanently. Let's see.

  6. It's what businesses always do in Canada.

    It's why Mulroney gave up on the garment workers after free trade.

    They don't upgrade, they just show bigger profits.

    • And why are you against bigger profits?

      I think before we make any big decisions about corporate tax rates, we should decide weather we want corporations to be profitable or not.

      • The purpose of a corporate tax cut is to encourage growth….new equipment, more employees, improved productivity.

        If all the businesses do is put it in their piggy banks….the govt has achieved nothing but lower revenue for themselves.

        • I'm pretty sure the purpose of a CIT cut is to let the corporations invest that money however they see fit.

          • But govts don't have to give that cut if the businesses aren't going to do anything useful with it.

  7. “Most importantly,” he said, “it's a confidence builder in Canada, and it's a way of branding Canada.”
    Flaherty

    Branded us?

    Like the GST cut branded us?

    Branded us as idiots, you mean!

  8. “Most importantly,” he said, “it's a confidence builder in Canada, and it's a way of branding Canada.”
    Flaherty

    Branded us?

    Like the GST cut branded us?

    Branded us as idiots, you mean!

    • LOL – you picked out the very quote I did…

      Flaherty admits that there is no evidence that supports the policy but confirms that he'll continue to pursue the policy because it sends the right message.

      I'd love to see any reliable information about how many jobs have been created by the Royal Bank or Bell or BMO set against their savings from tax cuts over the past few years. I've looked for the information, I can't find it. I have my suspicians, but I'd prefer some numbers.

      • And given the fact that our PM has pointed out in the most graphic terms that we are an island in a sea of troubles one can safely assume that the world will be coming to our shore eventually anyway – skipping over Ireland and Greece – that's for sure. Will this prevent the likelihood of a veritable torrent of investment leaving our shores being one of the arguements being used as to why we absolutely must have those CIT cuts?…fat chance.

  9. Join the club.

    Just go read Stephen Gordon blogs – he's quite explicit in that claim. To improve productivity.

  10. We are already the lowest corporate tax rate in the G8 and, most importantly, lower than the US.

    I do believe that a good tax policy and the right tax rate is important for competitiveness and prosperity.

    But it is not the only important thing and Ireland shows the very terrible dangers and risks of doing the low tax zone dance. If it is easy for companies to come to your jurisdiction for tax reasons, then it is just as easy for them to leave.

  11. We are already the lowest corporate tax rate in the G8 and, most importantly, lower than the US.

    I do believe that a good tax policy and the right tax rate is important for competitiveness and prosperity.

    But it is not the only important thing and Ireland shows the very terrible dangers and risks of doing the low tax zone dance. If it is easy for companies to come to your jurisdiction for tax reasons, then it is just as easy for them to leave.

    • Quoting tedbetts above: "But it is not the only important thing and Ireland shows the very terrible dangers and risks of doing the low tax zone dance. If it is easy for companies to come to your jurisdiction for tax reasons, then it is just as easy for them to leave"

      This is touching on the important part of the debate. Its clear that both extremes of corporate taxation have many potential problems (Ireland with perhaps too little corporate tax, and the US with too much), and we are currently somewhere in the middle with an ongoing election that has a great deal to do with what the appropriate level of taxation is. The Liberals have little to offer in their platform if their projections for corporate tax revenues are wrong, and the Conservatives speak as if the future of the nation is tied to a 15% tax rate.

      What needs to be publicly understood is what the optimal rate appears to be, and what can be gained by a cut vs how much can be raised with a hike of about the same amount. Few people are discussing this in terms of the hard numbers, so sadly the argument has become a people vs. corporations argument rather than a discussion of where the balance lies in terms of money and priorities.

    • Ted, there is a consensus among economists—whose positions are supported by hundreds of studies in peer-reviewed journals—that Harper's corporate tax cuts are smart policy. Don't you care about expert opinion? What does Bay Street think about Ignatieff's plan to hike corporate taxes?

      • Don Drummond sees no catastophic outcome from Iggy's returning the tax rate to that it was 3 months ago.

  12. Both the Tories and the Liberals are wading into a debate that has sharply divided economists. Business groups and conservative think tanks advocate lower taxes as a way to create jobs. Labour economists counter that lower taxes benefit only corporations and do little for the broader economy.

    But the reality is there are no easy answers when it comes to measuring the impact tax rates have on job creation. Economic growth in Canada can be attributed to a lot more than just corporate tax rates. Such things as commodity prices and the value of the Canadian dollar also play a role.

    The issue boils down to this: At a time when Ottawa and many provinces are awash in deficit, should governments invest scarce resources in making life more affordable for families by enhancing social programs or in giving corporations additional tax cuts?" Globe/Mail

    What Howlett left completely out of her article was any discussion of how well Canadian economy did during the past few years compared to just about anywhere else in world. So investment might not be increasing as much as we would like, many other economic numbers were quite good comparatively.

    Also, isn't labour economist an oxymoron?

    And all the jobs and wealth corporations create help the 'broader economy' a wee bit, surely.

  13. LOL – you picked out the very quote I did…

    Flaherty admits that there is no evidence that supports the policy but confirms that he'll continue to pursue the policy because it sends the right message.

    I'd love to see any reliable information about how many jobs have been created by the Royal Bank or Bell or BMO set against their savings from tax cuts over the past few years. I've looked for the information, I can't find it. I have my suspicians, but I'd prefer some numbers.

  14. Probably not discussed because it isn't true.

  15. And given the fact that our PM has pointed out in the most graphic terms that we are an island in a sea of troubles one can safely assume that the world will be coming to our shore eventually anyway – skipping over Ireland and Greece – that's for sure. Will this prevent the likelihood of a veritable torrent of investment leaving our shores being one of the arguements being used as to why we absolutely must have those CIT cuts?…fat chance.

  16. Articles like this make me think that some in the Journalism trade should be limited to human interest pieces only. Seeing reporting that requires even the slightest knowledge of math, science, engineering, technology, statistics, etc makes far too many in the news business look like fools.

    If the premise of this article were true, it would be VERY surprising. Not just newsworthy, but of serious academic interest. Proving, as this articles implies, that when a corporation receives a tax benefit, they utilize it to simply put in the bank as profits rather than investing capital assets that could further improve their revenue is HUGE. It shows that there is some sort of motive in a capitalist system where the managers of corporations just said 'We're big enough, lets just enjoy this reduced cost and keep things as they are'.

    Of course this is ridiculous. The Globe is only showing investment in terms of dollar value as a percentage of GDP. So, if the value of the goods in Canadian Dollars drops (perhaps because the value of the dollar rises dramatically vs foreign currencies) or GDP increases dramatically, that percentage will drop, even if there is a bump in the number of capital projects.

    Stephen Gordon makes this point well (much better than I can) in a column on the website of the Globe here: http://www.theglobeandmail.com/report-on-business

    So, the reporter misinterpreting simple information gets prominent placement while the economist who makes efforts to source his statements and isolate variables gets buried in the online version. Hence my first statement.

  17. Articles like this make me think that some in the Journalism trade should be limited to human interest pieces only. Seeing reporting that requires even the slightest knowledge of math, science, engineering, technology, statistics, etc makes far too many in the news business look like fools.

    If the premise of this article were true, it would be VERY surprising. Not just newsworthy, but of serious academic interest. Proving, as this articles implies, that when a corporation receives a tax benefit, they utilize it to simply put in the bank as profits rather than investing capital assets that could further improve their revenue is HUGE. It shows that there is some sort of motive in a capitalist system where the managers of corporations just said 'We're big enough, lets just enjoy this reduced cost and keep things as they are'.

    Of course this is ridiculous. The Globe is only showing investment in terms of dollar value as a percentage of GDP. So, if the value of the goods in Canadian Dollars drops (perhaps because the value of the dollar rises dramatically vs foreign currencies) or GDP increases dramatically, that percentage will drop, even if there is a bump in the number of capital projects.

    Stephen Gordon makes this point well (much better than I can) in a column on the website of the Globe here: http://www.theglobeandmail.com/report-on-business

    So, the reporter misinterpreting simple information gets prominent placement while the economist who makes efforts to source his statements and isolate variables gets buried in the online version. Hence my first statement.

    • What Gordon doesn't recognize (or perhaps understand) is that when there are record commodity prices and booms (as he has recently acknowledged in a blog) ending in 2007/08, companies expand – especially in the resource sector, using the same technologies – and often resulting in inflation. They don't make investments in productivity enhancing equipment – the better returns are elsewhere.

      But this would require some actual study of how businesses ACTUALLY make investment decisions.

      • Very true. I wouldn't want hold up Gordon's column as perfect either. Though I didn't read through the Statscan data that he used, I assumed that it would have included inflation as one of the 'price fluctuations' that would have been isolated to give the change in 'real' dollars.

        You bring up two other variables (commodity prices in an increasingly resource-based economy and whether the period examined was a time when a business would be expected to expand anyhow) that are very significant when looking at the argument that the Globe was trying to make. Of course, they were not considered. Gordon may not have adequately addressed them either, but my point was more to contrast the quality of the first Globe piece with Gordons.

        • Well, as I myself have been raising these points on his blog (before getting banned) asking unanswered questios, I may be biased.

        • BTW, if you were to search SG's twitter feed from a few days ago – he was engaging in a debate with someone on this very point – why no investment over the past decade in productivity enhancing equipment in spite of all of the CIT cuts.

          His reply was something to the effect – "This means we haven't cut far enough". And in another exchange (maybe earlier) he claims his predicted effect of 1.5-3% CIT cuts is based upon "evidence based" predictions. Go figure.

          • Dot, you know I'm a SG fan, but I still have to give you credit for being an intelligent layperson who isn't afraid to challenge expert opinion. Sincere kudos.

          • Well, I've actually worked within some of the biggest resource based companies in Canada, and have actually done/presented/reviewed economic investment decisions. So, it's questionable on this item who more of an expert, and who is more of a theoretician.

            Don't tell me you didn't understand that Alberta from about 2005 onward was in a boom (BC as well). Apparently no economists did, according to a SG blog where he tried to explain away the structural deficit. http://worthwhile.typepad.com/worthwhile_canadian

            At the time, he and other economists were saying no to GST cuts – do CIT or Personal IT cut instead – NOT no tax cuts at all (my position- get rid of the structural deficit first). I hardly doubt that we would not also be in a structural deficit had Flaherty followed their advice instead of his own.

          • I agree with CR. I wonder though if corporate tax cuts were instead helpful in maintaining Canada's strong performance in GDP and employment relative to other nations. I also agree with your assessment that companies will expand in whatever direction results in better returns, which in some cases may actually have a negative effect on productivity, but regardless, I cannot see anything but positive benefits from corporate tax cuts.

      • Dot is making a whole lot of sense:

        However I read somewhere that while corporate taxe rates have been steadely reduced since the 2000's corporate investment hasn't increased in response, it has stayed at the the same level.

        Now I know next to nothing when it comes to the economics of corporations (I've only begun getting interested) but how do you go about finding out if this is true? Or are such assertions not to be trusted because there is no way to be sure?

    • Very well put, but I'm afraid the twit/tweet obsessed culture we have in the western world has resulted in a society filled with individuals who have the attention span of a fruit fly. Really, any news stories longer than a few paragraphs may as well be War and Peace, and you surely must know that anything with a line graph screams BORING. The few of us left who appreciate deep analysis will soon go the way of the dodo…

  18. Quoting tedbetts above: "But it is not the only important thing and Ireland shows the very terrible dangers and risks of doing the low tax zone dance. If it is easy for companies to come to your jurisdiction for tax reasons, then it is just as easy for them to leave"

    This is touching on the important part of the debate. Its clear that both extremes of corporate taxation have many potential problems (Ireland with perhaps too little corporate tax, and the US with too much), and we are currently somewhere in the middle with an ongoing election that has a great deal to do with what the appropriate level of taxation is. The Liberals have little to offer in their platform if their projections for corporate tax revenues are wrong, and the Conservatives speak as if the future of the nation is tied to a 15% tax rate.

    What needs to be publicly understood is what the optimal rate appears to be, and what can be gained by a cut vs how much can be raised with a hike of about the same amount. Few people are discussing this in terms of the hard numbers, so sadly the argument has become a people vs. corporations argument rather than a discussion of where the balance lies in terms of money and priorities.

  19. What Gordon doesn't recognize (or perhaps understand) is that when there are record commodity prices and booms (as he has recently acknowledged in a blog) ending in 2007/08, companies expand – especially in the resource sector, using the same technologies – and often resulting in inflation. They don't make investments in productivity enhancing equipment – the better returns are elsewhere.

    But this would require some actual study of how businesses ACTUALLY make investment decisions.

  20. I had a longer reply, but the censor bot has apparently swallowed it – temporarily or permanently. Let's see.

  21. Very true. I wouldn't want hold up Gordon's column as perfect either. Though I didn't read through the Statscan data that he used, I assumed that it would have included inflation as one of the 'price fluctuations' that would have been isolated to give the change in 'real' dollars.

    You bring up two other variables (commodity prices in an increasingly resource-based economy and whether the period examined was a time when a business would be expected to expand anyhow) that are very significant when looking at the argument that the Globe was trying to make. Of course, they were not considered. Gordon may not have adequately addressed them either, but my point was more to contrast the quality of the first Globe piece with Gordons.

  22. Well, as I myself have been raising these points on his blog (before getting banned) asking unanswered questios, I may be biased.

  23. BTW, if you were to search SG's twitter feed from a few days ago – he was engaging in a debate with someone on this very point – why no investment over the past decade in productivity enhancing equipment in spite of all of the CIT cuts.

    His reply was something to the effect – "This means we haven't cut far enough". And in another exchange (maybe earlier) he claims his predicted effect of 1.5-3% CIT cuts is based upon "evidence based" predictions. Go figure.

  24. Very well put, but I'm afraid the twit/tweet obsessed culture we have in the western world has resulted in a society filled with individuals who have the attention span of a fruit fly. Really, any news stories longer than a few paragraphs may as well be War and Peace, and you surely must know that anything with a line graph screams BORING. The few of us left who appreciate deep analysis will soon go the way of the dodo…

  25. Dot is making a whole lot of sense:

    However I read somewhere that while corporate taxe rates have been steadely reduced since the 2000's corporate investment hasn't increased in response, it has stayed at the the same level.

    Now I know next to nothing when it comes to the economics of corporations (I've only begun getting interested) but how do you go about finding out if this is true? Or are such assertions not to be trusted because there is no way to be sure?

  26. Another unknown is how many of those companies would have set up shop elsewhere if corp. taxes were not coming down? Hanging onto money after a major recession is not unusual, however there has been much M&A activity across various industries so it looks like they may be starting to open those wallets. The price of oil affects spending as well.

    China is at a turning point of having to look for cheaper labour.
    http://www.forbes.com/feeds/ap/2011/04/05/busines

  27. Another unknown is how many of those companies would have set up shop elsewhere if corp. taxes were not coming down? Hanging onto money after a major recession is not unusual, however there has been much M&A activity across various industries so it looks like they may be starting to open those wallets. The price of oil affects spending as well.

    China is at a turning point of having to look for cheaper labour.
    http://www.forbes.com/feeds/ap/2011/04/05/busines

  28. Corp tax cuts were supposed to increase productivity.

    They failed miserably. Simple. Undeniable.

  29. I was about to thumb you up until "isn't labour economist an oxymoron."

  30. The Globe piece is already being debunked by real economists. The short version is that it's a steaming load of bull excrement.

  31. The Globe piece is already being debunked by real economists. The short version is that it's a steaming load of bull excrement.

        • Of course there is … especially when mainstream permits a very narrow
          frame for debate. And that Wiki article needs a lot of work.

    • About halfway through the article my heart kind of sunk and I kicked myself for even reading it, the economic argument was so shallow. Once they skipped past that the author framed the question as a choice between ‘social support spending’ and ‘tax breaks to corporations’. I would say an accurate wording would have put it as something like ‘the benefits to the Canadian workforce accruing from improving the business climate’. Even if the breaks have not gone to productivity that doesn’t mean that they haven’t benefited the economy in other ways. It also seems to me that there’s a logical fallacy or even just a mental tic going on in assuming that tax breaks need to change productivity spending to increase them. It should make perfect sense that the money is spent at the same percentages as their operating cash before.

    • The author of the G&M story was on Power Play late edition with Don Martin last night – and indicated she spoke /interviewed about 10 economists before writing her piece.

      No doubt the "real" economists include all of the right leaning ones – SG, MM, AC, JM, KM – just look at the twitter traffic on AC's account for the full names.

      • Here's the Power Play clip with G&M reporter Karen Howlett.

        Btw, did you notice who the CPC talking heads were referencing for their talking points on earlier programs of PP and P&P – Stephen Gordon's lame defence.

      • Oops – half a dozen, not 10.

  32. Ted, there is a consensus among economists—whose positions are supported by hundreds of studies in peer-reviewed journals—that Harper's corporate tax cuts are smart policy. Don't you care about expert opinion? What does Bay Street think about Ignatieff's plan to hike corporate taxes?

  33. Dot, you know I'm a SG fan, but I still have to give you credit for being an intelligent layperson who isn't afraid to challenge expert opinion. Sincere kudos.

  34. How is produictivety improved if they keep the money in cash reserves? Does he explain that?

  35. Don Drummond sees no catastophic outcome from Iggy's returning the tax rate to that it was 3 months ago.

  36. Of course there is … especially when mainstream permits a very narrow
    frame for debate. And that Wiki article needs a lot of work.

  37. I agree with CR. I wonder though if corporate tax cuts were instead helpful in maintaining Canada's strong performance in GDP and employment relative to other nations. I also agree with your assessment that companies will expand in whatever direction results in better returns, which in some cases may actually have a negative effect on productivity, but regardless, I cannot see anything but positive benefits from corporate tax cuts.

  38. Well of course higher taxes are good for business.

    They're good for everyone!!! The more taxes the better…for all.

    Signed,

    The nanny state leftists

  39. Well of course higher taxes are good for business.

    They're good for everyone!!! The more taxes the better…for all.

    Signed,

    The nanny state leftists

    • kody, kody, kody.

      Still using double spacing….

  40. About halfway through the article my heart kind of sunk and I kicked myself for even reading it, the economic argument was so shallow. Once they skipped past that the author framed the question as a choice between ‘social support spending’ and ‘tax breaks to corporations’. I would say an accurate wording would have put it as something like ‘the benefits to the Canadian workforce accruing from improving the business climate’. Even if the breaks have not gone to productivity that doesn’t mean that they haven’t benefited the economy in other ways. It also seems to me that there’s a logical fallacy or even just a mental tic going on in assuming that tax breaks need to change productivity spending to increase them. It should make perfect sense that the money is spent at the same percentages as their operating cash before.

  41. And why are you against bigger profits?

    I think before we make any big decisions about corporate tax rates, we should decide weather we want corporations to be profitable or not.

  42. The purpose of a corporate tax cut is to encourage growth….new equipment, more employees, improved productivity.

    If all the businesses do is put it in their piggy banks….the govt has achieved nothing but lower revenue for themselves.

  43. I'm pretty sure the purpose of a CIT cut is to let the corporations invest that money however they see fit.

  44. But govts don't have to give that cut if the businesses aren't going to do anything useful with it.

  45. Well, I've actually worked within some of the biggest resource based companies in Canada, and have actually done/presented/reviewed economic investment decisions. So, it's questionable on this item who more of an expert, and who is more of a theoretician.

    Don't tell me you didn't understand that Alberta from about 2005 onward was in a boom (BC as well). Apparently no economists did, according to a SG blog where he tried to explain away the structural deficit. http://worthwhile.typepad.com/worthwhile_canadian

    At the time, he and other economists were saying no to GST cuts – do CIT or Personal IT cut instead – NOT no tax cuts at all (my position- get rid of the structural deficit first). I hardly doubt that we would not also be in a structural deficit had Flaherty followed their advice instead of his own.

  46. The author of the G&M story was on Power Play late edition with Don Martin last night – and indicated she spoke /interviewed about 10 economists before writing her piece.

    No doubt the "real" economists include all of the right leaning ones – SG, MM, AC, JM, KM – just look at the twitter traffic on AC's account for the full names.

  47. kody, kody, kody.

    Still using double spacing….

  48. Here's the Power Play clip with G&M reporter Karen Howlett.

    Btw, did you notice who the CPC talking heads were referencing for their talking points on earlier programs of PP and P&P – Stephen Gordon's lame defence.

  49. His view is that theory trumps facts.

  50. Oops – half a dozen, not 10.

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