Do Corporate Tax Cuts Really Pay For Themselves?
A new paper by Jack Mintz ( with Duanjie Chen) argues that “corporate tax reductions of more than 30% since 2000 have, contrary to the critics’ cries, failed to make an appreciable dent in tax revenues thanks to multinationals habit of shifting profits to Canada to take advantage of lower rates.”
This is the subject of a report in ipolitics, contrasting the argument of Mintz and Chen report to last year’s “Corporate Tax Freedom Day” report by the Canadian Labour Congress
Mintz and Chen do show (Figure 3) that corporate tax revenues have remained quite stable as a share of GDP as the statutory rate has fallen from 2000 to 2010. However, the same Figure shows that corporate taxable income has been generally increasing as a share of GDP since 2005. In other words, the effective tax rate (tax as a percentage of profits) has been falling. It follows that if the statutory tax rate had been maintained unchanged, corporate tax revenues would have risen as a share of GDP.
The argument that corporations will try to shift their taxable income to low tax jurisdictions is probably true to a degree. But it is important to underline that this is an argument for countries to co-operate to maintain the corporate income tax base, rather than resort to “beggar thy neighbour” policies which increase profits and the wealth of shareholders at the expense of public services and social programs.
It should be noted that governments are under no major illusion that corporate tax cuts are costless in terms of foregone revenues. The outlook for revenues in the 2010 federal budget stated that ” growth in corporate tax revenues is projected to moderate to 2.0% in 2012-13 largely due to the decline in the general corporate income tax rate to 15% in 2012 and other tax relief measures as well as a moderation in profit growth.” (p.177) Even Mintz and Chen concede in their report (p.19)Â that “the Ontario government will gain some revenue in the short-term by raising its legislated corporate rate.”
A final thought to bear in mind. Given deficits at both the federal and provincial level, governments are effectively borrowing money to pay for corporate tax cuts. Meanwhile, Mark Carney and Jim Flaherty both recognize the central argument of the Canadian Labour Congress report – that corporations are sitting on large hoards of cash and are not ramping up new investment in a major way.
We would be better off to maintain corporate tax rates, and use the needed revenue to bolster real investment in the economy through more targeted measures and through higher levels of public investment.
Another explanation is that the share of income going to profits has been rising as the wage share is falling. Some would say that the story of the past 30 years is of the bosses stealing the productivity gains of the workers… by attacking collective bargaining, maintaining a reserve army of unemployed, etc.
This paper describes the phenomenon and gives evidence: http://www.bls.gov/opub/mlr/2011/01/art3full.pdf
The reason that cutting corporate taxes doesn’t lead to more investment or growth is because a lot of the profits are economic rent in the classical sense. It’s not like the banks and mining companies and property speculators face perfect competition in a free market, so taxing a portion of their excess profits will not cause them to change their behaviour, just as untaxing them hasn’t caused them to invest in productive enterprises.
Time to resurrect an old idea: Economic Rent
http://www.ourdime.us/1147/concepts/time-to-resurrect-an-old-idea-economic-rent/
It’s bizarre – in the Globe coverage one of the authors of the report, I believe it was Mintz, called for coordinated effort across jurisdictions to keep the rates low – if anything, his finds argue against that, but I have the feeling he’s against any effective taxation.
Now can one of the economists on this blog please join Econowatch at Maclean’s to counter-act Stephen Gordon. Yeesh.
The Urban-Brookings Tax Policy Center south of the border has revised its models such that it now believes that labour pays 20% of the cost of a corporate tax burden.
If that’s so, then if corporate taxable income has been generally increasing as a share of GDP that would not mean that this has entirely come at the at cost of labour’s share.
I might add the the bipartisan Tax Policy Center would be very skeptical of the call for “targeted measures”. The tax system, especially in the US, is already extremely targeted. That’s why the tax code is so huge! A subsidy and a deduction are largely interchangeable economically, both amount to being “targeted measures.” The biggest problem with an industrial policy is that it encourages rent seeking as businesses ramp up lobbying instead of production in order to grab a piece of the “targeted measures” the politicians are mulling.
A more complete quote from page 19 of the Mintz report cited:
“Although the Ontario government will gain some revenue in the short run by raising its legislated corporate rate of 10 percent to 11.5 percent in 2013, the effect will be to hurt growth and jobs. Roughly, Ontario will lose $7.5 billion in capital investment in the long run by forgoing plans to reduce the general corporate rate to 10 percent by mid-2013.”