THE CASE AGAINST CORPORATE TAX CUTS: Canadian Corporations Awash in Cash Don't Need More Tax Relief

By Jackson, Andrew | CCPA Monitor, June 2005 | Go to article overview
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THE CASE AGAINST CORPORATE TAX CUTS: Canadian Corporations Awash in Cash Don't Need More Tax Relief


Jackson, Andrew, CCPA Monitor


In truly Pavlovian fashion, the words "corporate tax cut" seem to immediately trigger the words "investment" and "jobs" in corporate and media circles. It is taken as absolutely axiomatic that lower business taxes lead to more investment and more jobs.

The demand of the federal NDP to rescind a new round of corporate tax cuts was widely seen as nothing short of economic lunacy. The Globe and Mail, for example, sternly editorialized about killing the geese that lay the golden eggs, and gave full coverage to apoplectic reactions from business lobby groups.

What was completely lost in this coverage was any sense of the tenuous links between business taxation and the process of real investment and job creation. Over the past few years, corporate profits have soared to a record high as a share of national income, and the bottom line has been further boosted by deep cuts in the corporate tax rate.

Meanwhile, job-creating corporate investments in buildings and machinery and equipment have lagged. Corporate Canada is awash with cash, but soaring profits are being invested outside the country in record amounts, stashed in offshore tax shelters, or paid out to corporate insiders and shareholders.

Corporate taxes, in any case, are only one small element in the investment decision, and recent reports by KPMG and the Economist actually rank Canada very highly in both tax competitiveness and overall cost competitiveness. Our key economic weaknesses as a country are in the building blocks of a knowledge-based economy: in areas like innovation and skills.

Social investments in early childhood education, expanded access to post-secondary education and new environmental infrastructure should, as argued in the CCPA's Alternative Federal Budget, be seen as policies which address our lagging productivity and create good jobs.

The key question is whether surpluses should be spent on further corporate tax cuts or on new public investments.

The relentless corporate lobby for lower business taxes scored yet another win in the 2005 federal Budget., which proposed to cut the federal corporate tax from 21% in 2005 to 19% by 2010, building on the large rate reduction from 28% to 21% which took place over the last five years, between 2000 and 2005.

The icing on the cake for business was the planned elimination of the corporate surtax by 2008, on top of the phaseout of the federal capital tax on corporations, which will be completed that year.

Corporate income tax revenues in 2005-06-when the tax rate will be 21%-are estimated to be $29.2 billion, or about $1.4 billion for each percentage point of the corporate income tax rate. This implies that the annual cut to federal revenues from corporate income tax rate cuts in the 2005 Budget would be some $2.8 billion if the new measures are fully implemented. (This includes elimination of the surtax.)

The full corporate tax rate cut of nine percentage points implemented between 2000 and 2010, plus the elimination of the surtax and capital tax, will reduce annual federal government revenues by $12.6 billion in 2010 and in future years, assuming corporate pretax profits remain at current levels. That is about $400 for every Canadian.

The case put forward for these deep corporate tax cuts is that Canada will lose out on new business investment if our corporate tax system is not "competitive" with that of the United States and other major economies. The 2005 Budget was quite explicit on this point: "In today's global economy, capital is highly mobile internationally, and a competitive tax system is critical to fostering business investment in Canada. Investment in new capital improves productivity, leading to economic growth, and higher wages and living standards." (P.152.)

In short, the payoff from a more "competitive" tax system is supposed to be more business investment and better jobs. And, to get more investment, Canada needs a "corporate tax advantage.

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