Jack Mintz Eats Up Ontario’s Budget

This past week, Jack Mintz issued a report (PDF) praising Ontario’s last provincial budget.

I like East Side Mario’s because it features both all-you-can-eat bread and all-you-can-eat salad. So, it is not surprising that a corporate tax-fighter would love a budget featuring both corporate income tax cuts and the removal of sales tax from business inputs. Queen’s Park is giving Bay Street the full-meal deal.

The report has been taken and covered at face value. In fact, its figures on marginal effective tax rates, capital investment, and job creation are highly questionable.

Marginal Effective Tax Rate (METR)

Mintz lauds Ontario’s tax changes for lowering the province’s METR, which will allegedly attract more investment. But a company deciding whether to establish a facility in Ontario or elsewhere would be more concerned about the facility’s total tax liability than about the tax owed on the last (marginal) dollar invested in it. For business-location decisions, average effective tax rates – which Mintz does not examine – are more relevant than marginal effective tax rates.

Even if METR were the right variable, there are different ways of measuring it. Mintz usually excludes R&D tax incentives (which are more generous in Canada than elsewhere) and municipal taxes (which are generally lower in Canada than elsewhere). A more comprehensive measure would probably reveal relatively lower METRs in Canada.

Even if we accept Mintz’s definition of METR, it is not clear that provincial tax cuts were needed to make the Ontario “competitive.” He estimates a pre-budget METR of 34%, which federal corporate tax cuts would reduce even without provincial changes.

Mintz’s last Tax Competitiveness Report indicates that, weighting countries by economic size, the global average METR is 29%. So, even by his numbers, Ontario’s business taxes were not much out of line with the rest of the world.

But why not keep slashing business taxes to make Ontario ultra-competitive? For one thing, Ontario has a budget deficit. While Dalton McGuinty is being compared to Bob Rae for running a large deficit, he should perhaps be compared to Mike Harris for enacting costly tax cuts despite an existing deficit.

Ontario’s early childhood development plan has prompted pundits to ask whether the provincial government can afford the extra $1.5 billion annually. Why are they not asking the same question about $2.3 billion annually for corporate tax cuts and billions more to remove sales tax from business inputs?

Capital Investment

The report projects that these business tax cuts will increase capital investment by $47 billion over ten years. This projection is dubious for two reasons.

First, the hypothesis that lower corporate taxes will prompt more investment has not been borne out empirically. Deep federal corporate tax cuts since 2000 did not lead to buoyant corporate investment (outside the oil industry).

Second, US-based corporations will have to pay the 35% American federal corporate tax rate on profits repatriated from Ontario no matter how low the provincial government slashes its corporate tax rate. For these companies, Ontario’s corporate tax cuts are just redirecting tax payments from Toronto to Washington.

Job Creation

Even if we accept Mintz’s capital-investment projection, his claim of 591,000 more jobs is completely bogus.

For a given level of output, if business substitutes more capital for labour, employment actually declines. (Indeed, a notable blooper in the harmonization debate was the Ontario Chamber of Commerce promoting an economic model of the HST that predicted more investment but fewer jobs.)

Over the longer term, more capital investment probably would increase output and employment. However, Mintz vastly overstates the likely increase.

He assumes a fixed ratio of labour to capital, so that employment income must rise by the same percentage as capital investment. He further assumes fixed wages, so that all growth in employment income must represent additional jobs.

The report’s footnotes acknowledge that these assumptions are likely wrong. However, the strategy seems to be floating an impressively large job number for the media to report without footnotes.

UPDATE (November 8): It looks like The Jurist beat me to the punch in critiquing Mintz’s report. My feeble excuse is that our website was down when I tried to post the above critique yesterday.

UPDATE (November 12): Quoted by Canadian Press

UPDATE (February 9): The following letter is on page A18 of today’s Toronto Star:

At least HST has created one job

Re: McGuinty rejects call to reduce blended tax, Feb. 5

Premier Dalton McGuinty says, “Economists have told us that our package of tax reforms will lead to 600,000 more jobs.” He appears to be using a projection from the University of Calgary’s Jack Mintz. But is this projection reasonable?

Mintz claims that business tax cuts will greatly increase investment. He then assumes a fixed ratio of labour to capital, so that employment income automatically increases by the same proportion as investment. Finally, he assumes fixed wage rates, so that all growth in employment income must represent additional jobs.

It is nice that the tax package has created at least one job: using dubious assumptions to manufacture inflated employment projections.

Erin Weir, Economist, United Steelworkers, Toronto