Do C. D. Howe’s Numbers Support its Policies?
The basic storyline of today’s C. D. Howe Institute “E-Briefâ€, “Canada Lagging Peers in 2013 Business Investment Growth,†is that corporate tax cuts helped boost investment per worker in Canada above the OECD average. Yet corporate Canada is slipping in 2013 and apparently needs more tax cuts.
However, the C. D. Howe Institute’s own graph (Figure 1 on page 3) shows no improvement in Canadian business investment – either in absolute terms or relative to the OECD average – between 2000 and 2004, when the former Liberal government slashed the federal corporate tax rate from 29% to 22% (including the 1% surtax).
The improvement in Canadian business investment corresponds to the subsequent rise in commodity prices, which began years before the Conservative government cut the federal corporate tax rate from 22% in 2007 to 15% in 2012.
Today’s E-Brief suggests, “British Columbia’s replacement of its Harmonized Sales Tax this year with a less investment-friendly retail sales tax may help explain its 9 percent drop in investment per worker, the worst percentage drop in the country.â€
Interestingly, it does not provide percentages for other provinces, so I calculated them from the figures in Table 1 on page 4:
Investment per Worker, 2012 to 2013
BC: $13,000 to $11,800; -9 %
AB: $33,100 to $33,200; 0 %
SK: $24,200 to $22,600; -7%
MB: $9,500 to $10,600; +12%
ON: $8,300 to $8,500; +2%
QC: $9,800 to $9,200; -6%
NB: $8,700 to $8,700; 0%
NS: $5,400 to $6,800; +26%
PEI: $5,200 to $6,400; +23%
NL: $32,100 to $35,800; +12%
Canada: $13,200 to $13,300; +1 %
Note that Saskatchewan suffered the next largest drop in investment per worker, despite having the second-lowest “marginal effective tax rateâ€, according to the C. D. Howe Institute’s latest version of that measure (Figure 2 on page 7). The only significant change in provincial taxes and royalties this year was a reduction in uranium royalties, which was supposed to spur investment.
The provinces enjoying the largest increases in investment per worker are Nova Scotia and PEI, which are tied for the highest provincial corporate tax rate of 16% (and have the highest and third-highest “marginal effective tax rates.â€) The next largest increases were in Newfoundland and Manitoba, which hiked its retail sales tax this year – the same type of tax that was allegedly so harmful to investment in BC.
The relationship between business taxes and business investment is not nearly as clear-cut as the C. D. Howe Institute argues.
http://www.nakedcapitalism.com/2013/11/has-qe-stimulated-credit.html
A good post Erin, and more evidence in the US that investment is just not happening, and a lot of it has to do with finance and investment climate especially to the small and medium size business. i.e. if all we are going to have is a monetary approach to reviving the US economy i.e. quantitative easing and to a lesser extent the Canadian economy, then what we are getting is the whole notion of “pushing on a string”. It seems that Yves and co at the Naked Capitalists are making that most of the QE that has been done to make increase liquidity and hence make money cheaper is merely benefiting the finance sector- not by lending that money out, but merely circulating it within the financial speculative circuitry. Essentially, it is not making its way into the productive capital circuitry, and until QE does make that jump from keeping the speculators happy to creating productive investment and and hence creating good jobs, then we will be stuck in this mud. This is very much the cart before the horse scenario, i.e. we need wages to grow and hence demand generation before we will see any movement with investment.
So what can we do, given stimulus spending has not gotten the light of day policy wise since 2010 when the world’s government’s coordinated a massive fiscal surge- which effectively kept the recession from slipping to depression for most of the world economies.
Now we are hearing that when QE and the taper comes forth, which at some point it will, some are declaring it will tip us right back into a recession in many countries. However, interesting seeing the housing market in the US, still mired in slump. And now, I have been hearing that default rates on sub-prime auto lending which has kept the US auto sector in a healthy space are on the rise.
I wonder where to next- financialization still seems to be the focus of the US policy.