The Stephen Harper government’s commitment to further reduce the general corporate income tax rate while the nation struggles with budgetary deficits has been championed by—surprise!—the corporate sector.
But the majority of Canadians, including business owners and those who work for them, say no to these cuts now.
Here are five economic reasons not to keep reducing the federal corporate tax rate this year or next.
Least effective job creation measure: According to the nation’s official number crunchers, if you want policy to encourage job creation, cutting corporate taxes is the weakest option (20 cents growth from every dollar of tax cut). Spending on infrastructure has the most impact ($1.50 on every dollar spent). The Department of Finance shows that spending on income supports for the unemployed and for low-income Canadians has an equally big pop, and housing initiatives are almost as good ($1.40 for every dollar spent).
Little impact on investments: Federal corporate tax rates have fallen from 28 percent in 2000 to 18 percent in 2010. Business investment (in non-residential structures and equipment) as a share of GDP was 12.4 percent in 2000. It was also 12.4 percent in 2009, and on track for the same in 2010. In the 1960s, the heyday of industrial expansion and economic development in Canada, the federal corporate tax rate was 40 percent. Statistics Canada’s data on business investment starts in 1981. That year the federal corporate tax rate was 36 percent, and business investment represented 11.5 percent of the economy. By 1990 the federal corporate tax had fallen to 28 percent. Business investment had fallen to 10.8 percent of the economy. There are many factors that drive business investment practices, and while taxes are a consideration, they are not the primary factor in investment decisions. The historic evidence shows that a commitment to this strategy is a costly faith-based proposition.
Pay more tax to cut taxes: Since fall 2010 the Harper team has been saying corporate tax cuts “pay for themselves”. But Budget 2009 figures show that reducing the general corporate tax rate from 22.12 percent in 2007 to 18 percent by January 2010 removed $6.7 billion annually from public coffers, right through the worst of the recession. Cutting the rate further this year to 16.5 percent meant another $2.8 billion in foregone revenues annually. The Harper team’s commitment to reducing the corporate tax rate to 15 percent will reduce the size of the public purse by $13.7 billion annually by 2012, according to Finance estimates, at which time the federal budgetary deficit will be between $21 and $26 billion (the range of Finance, PBO and IMF estimates). Financing this tax cut requires borrowing more money. The average Canadian taxpayer will pay interest on the borrowed money to provide a tax break for profitable corporations.
False economies: The Harper government viewed infrastructure spending as an extraordinary one-time stimulus measure. The Federation of Canadian Municipalities estimates a $123-billion deficit in backlogged repairs and maintenance to core municipal infrastructure. This includes roads, bridges, water and waste systems, transit, and municipal buildings—but not social housing, schools, or hospitals. The FCM estimates another $115 billion for new builds to meet new demands. Corporations may be getting a break, but they aren’t responsible for public infrastructure. Governments are. We are. It is a false economy to stick the next generation with an unnecessarily high price tag for what should be happening now—rebuilding the foundation for business, family, and community needs everywhere, while the cost of borrowing is at historic lows and unemployment is still high.
The question of working capital: Finance Minister Jim Flaherty says Canada’s tax rates on new business investment are the lowest in the G7. Who are we competing with? It’s time for a reality check: Canada’s corporate sector is sitting on a growing pile of capital. In the recessions of the 1980s and 1990s the business sector was a net borrower of cash to cover their costs, as one might expect during lean times. In contrast, during the latest recession the business sector just kept generating bigger and bigger surpluses. In 2007 the net surplus of the sector was $43 billion. By 2008 it was 57 billion and by 2009 $59 billion. By third quarter 2010 $51 billion was generated in surplus. That’s the surplus in the annual flow. The accumulated stock of ready cash (currency, deposits, and short term paper) in the non-financial corporate sector had grown to $489 billion by third quarter 2010. That’s a lot of money. When it finally gets put to work, we are likely to witness a wave of corporate consolidation. But mergers and acquisitions don’t necessarily create jobs in Canada.
An across-the-board general corporate income tax rate cut rewards companies whether they create jobs or kill them. The primary sector of the Canadian economy is increasingly in the hands of off-shore investors, who take the profits and jobs elsewhere. That’s global capitalism, but we don’t need to reward it. We can target and reward the firms that put their capital to work in Canada, creating jobs and value-added enterprises.
Armine Yalnizyan is a senior economist at the Canadian Centre for Policy Alternatives.