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Does cutting the Corporate Income Tax (CIT) promote growth?


cybercoma

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Economist Jason Brennan looks at the corporate tax rate in Canada and how it relates to corporate profits. You can read his summary of the findings here, but I will discuss them below.

Economic thinking since the 1980s goes that loosening the tax burden on corporations will encourage them to invest in infrastructure, jobs, and other ways of expanding the economy. Help us help you is the mantra. So we embarked on a journey of slashing the corporate income tax rate in order to encourage jobs and growth.

Every government since then has followed the same line of thinking. Mulroney's government cut the CIT from 36% to 29% during his tenure. The Liberals under Chrétien and Martin cut deeper from 28% to 22% by 2004. The Harper Government made a straight cut to the statutory rate from 21% to 15%, as well as eliminating the 1.1% surtax. The provinces also reduced their share of CIT from an average of 14% to 11%. Over the last 30 years, the CIT has been halved by successive governments.

If conservative economic thinking is correct, then this should lead to exceptional growth. More money in the hands of the biggest corporations in Canada should mean more jobs, investment, and growth. Except that assumption never came true. As the corporate rate fell, so too did corporate infrastructure investments as a proportion of GDP. In fact, historically there is a positive relationship between infrastructure investment and the CIT. The lower the CIT the less investment. While the corporate rate was falling, the GDP ground to a trickle. Somehow I doubt that's what conservative economists mean by trickle-down economics.

So what did the top corporations do with the savings afforded to them by reduced CIT if they weren't investing it in growing the economy, expanding their businesses, and providing jobs for Canadians? They sat on it.

p3NQUAy.jpg

The graph above, created by Brennan, shows the Corporate Income Tax rate inverted and overlaid with corporate cash on hand, i.e., money being held by companies that are not financial institutions (this doesn't include banks).

These findings point to a considerable mistake made by successive governments both federal and provincial over the last generation. Our weak economy may be at least in part a product of poor economic policy based on faulty assumptions. Trickle-down economics never worked and will never work. It's time to end the last 30 years of backwards thinking.

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In principle, yes; though it must be balanced with the need to reduce the Federal debt. One possibility would be an austerity policy of high taxes and low spending until the Federal debt is eventually eliminated, followed by the elimination of corporate taxes.

One problem with high corporate taxes is that it can cut into workers' wages or lead to layoffs. German-style codetermination laws could mitigate could mitigate these negative side effects at leaSt somewhat by ensuring that should workers have to take a pay cut, that upper management will have to do so too.

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It seems the more they cut corp.taxes, the health care transfers also drop, which make it harder for middle and lower incomers and the provinces. The corps. since the down turn in 2008, just keep their profits and its time some government says to them, spent the money to create jobs OR we will taxed you. If governments keep dropping taxes for Corp. then they have to increase taxes for taxpayers because they won't have enough revenues.

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In principle the conservatives and liberals are right. More money in the hands of business should stimulate growth. Unfortunately there are other big factors in play.

Like zero population growth, and a market place that's very saturated with competition. Lower taxes on corporations is equal across the field of corporate players. And with the market as saturated as it is, the competition level has forced all corporations to simply transfered the tax cut into less expensive products for the consumer. Now that helps the consumer with his ability to buy more.

If you want to grow the economy, Stimulate families to have as many children as they can. For businesses to grow. The market demand must grow. That is the underlining factor. Demand trumps everything for economic growth. Population and the rate at which they can consume.

Edited by Freddy
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The answer is it depends. It's yes and no, depending on other things. Especially what levels of taxation are currently in place, what levels one is cutting to, and when levels one is competing against. It's s much more complex question than just a yes or no.

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The answer is it depends. It's yes and no, depending on other things. Especially what levels of taxation are currently in place, what levels one is cutting to, and when levels one is competing against. It's s much more complex question than just a yes or no.

It depends on all variable factors of Supply and demand.

Edited by Freddy
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Economist Jason Brennan looks at the corporate tax rate in Canada and how it relates to corporate profits. You can read his summary of the findings here, but I will discuss them below.

Economic thinking since the 1980s goes that loosening the tax burden on corporations will encourage them to invest in infrastructure, jobs, and other ways of expanding the economy. Help us help you is the mantra. So we embarked on a journey of slashing the corporate income tax rate in order to encourage jobs and growth.

Every government since then has followed the same line of thinking. Mulroney's government cut the CIT from 36% to 29% during his tenure. The Liberals under Chrétien and Martin cut deeper from 28% to 22% by 2004. The Harper Government made a straight cut to the statutory rate from 21% to 15%, as well as eliminating the 1.1% surtax. The provinces also reduced their share of CIT from an average of 14% to 11%. Over the last 30 years, the CIT has been halved by successive governments.

If conservative economic thinking is correct, then this should lead to exceptional growth. More money in the hands of the biggest corporations in Canada should mean more jobs, investment, and growth. Except that assumption never came true. As the corporate rate fell, so too did corporate infrastructure investments as a proportion of GDP. In fact, historically there is a positive relationship between infrastructure investment and the CIT. The lower the CIT the less investment. While the corporate rate was falling, the GDP ground to a trickle. Somehow I doubt that's what conservative economists mean by trickle-down economics.

So what did the top corporations do with the savings afforded to them by reduced CIT if they weren't investing it in growing the economy, expanding their businesses, and providing jobs for Canadians? They sat on it.p3NQUAy.jpg

The graph above, created by Brennan, shows the Corporate Income Tax rate inverted and overlaid with corporate cash on hand, i.e., money being held by companies that are not financial institutions (this doesn't include banks).

These findings point to a considerable mistake made by successive governments both federal and provincial over the last generation. Our weak economy may be at least in part a product of poor economic policy based on faulty assumptions. Trickle-down economics never worked and will never work. It's time to end the last 30 years of backwards thinking.

Your right on about lowering taxes on corperations. It won't do a thing to help grow our economie a whole lot.

My philosophy is help the population grow and your economie will grown as a simple conseuquence.

Edited by Freddy
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If corporate tax rates were high then yes, the cuts would make a difference.

Cutting based on current corporate tax rates: no.

For my corporation the tax rate would have little to no effect on my business.

My business depends on things like having enough qualified staff to do the work and to effectively have the systems in place to deal with workload capacity that is very heavy during part of the year and quite light during the rest of the year. Time, as in my ability to work, also is maxed out.

So the 18% small corporate tax cut is nothing more than a gift/bribe from Harper.

I am not so stupid as to turn down $1,000 of net income because I may pay $110 vs the proposed $90 of federal corporate tax on it.

Extrapolate those numbers all you want but the difference is trivial for each small corporation but can add up to quite a sum when you are the government and collecting from thousands and thousands of small corporations.

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Canada's population growth rate has been between 1-1.2% for the last 35 years.

Stimulate that to 5% population growth , and in the long run you will have 5% economic growth. It's almost that simple. If our buying power stay's relatively the same.

Alleviate the difficulties of having children, in the hope we reproduce at higher rates.

Free daycare could help the economies

Edited by Freddy
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Except that this didn't happen.

The problem with healthcare transfers is not that they dropped, but that the increases were reduced. Stop splitting hairs over the subject. The bigger issue is that there was no consultation with the provinces over the healthcare needs of an aging population before making that decision. It speaks to the uncooperative nature of the Harper Government™ on anything related to the provinces. Harper is not a diplomat and not even a good politician. He wants things his way and that's that. He rams his ideas through and only when they get so bad that it threatens his grip on power does he back down and change things. His obsession with power is at once his best and worst quality.

Edited by cybercoma
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The problem with healthcare transfers is not that they dropped, but that the increases were reduced. Stop splitting hairs over the subject.

Maybe you consider the truth to be splitting hairs, but I don't.

The bigger issue is that there was no consultation with the provinces over the healthcare needs of an aging population before making that decision.

There doesn't need to be. They now have predictable funding to infinity. The increase is still more than the increase in health spending in almost every province.

It speaks to the uncooperative nature of the Harper Government™ on anything related to the provinces.

The Harper Government is uncooperative with everyone.

Harper is not a diplomat and not even a good politician.

And yet, after 3 wins, he's barely behind, during a terribly economic and political climate.

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Wow, everyone's an expert in this thread! It's amazing. Everyone just knows, no doubt at all.

If you guys are so convinced about the effects of a corporate tax cut, could you please give me a testable economic model that predicts your effects and the empirical data in support for it?

@ Cybercoma - with respect to simply looking at the correlation of 2 parameters over time, you can't really draw too much information from that since you don't know if there is causality and there are a lot of things that have changed over time. If you plot atmospheric CO2 and the inverted corporate tax rate you will find a positive correlation, that doesn't mean CO2 causes the corporate tax rate to drop.

With respect to your question, I think you are asking the wrong question. A reduction in the corporate tax rate would cause the long run level of output to change, not the long run growth rate. In the short run you would have a change in the growth rate, but not in the long run. So rather you should ask 'is a reduction in the corporate tax rate good for economic output in the long run?'.

With respect to the effects of corporate tax rate, from memory, the corporate tax rate has (for the most part) a lower marginal increase in tax revenue for a given marginal cost the the economy than income or sales taxes (I think a lot of the reason is due to how it affects investment). I'm not really sure it makes sense to have a corporate tax: 1. It makes things more complicated. 2. It acts as double taxation when combined with income tax, so is more distortionary. 3. The well-being of the people in a society is what matters. Inequality in among people in your society should be of primary concern, not inequality of corporations. Income taxes are a far more direct way of dealing with income inequality.

But I guess to most people, corporations are these abstract concepts that aren't people, so there is not cost to them if you tax corporations. Many people think it allows them to have their cake and eat it too (more tax revenue without any cost to them).

Anyway, here are some links to studies on the effects of different forms of taxation in Canada. It did not take long to find, google is useful.

https://www.cdhowe.org/pdf/Commentary_324.pdf

http://www.policyschool.ucalgary.ca/sites/default/files/research/bev-dahlby-012-3.pdf

http://www.ieb.ub.edu/files/PapersWSFF2015/WSTAX2015Ferede.pdf

It appears that the marginal cost of corporate taxes is higher than the marginal cost of income taxes for Canada and for all provinces except Quebec (although the 2015 study suggests its true for Quebec now as well).

Edited by -1=e^ipi
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Corporations in Canada are sitting on $680 Billion in cash deposits. That's more than the country's entire debt. We've also fallen to last amongst peer countries for corporate investment in R&D.

http://www.pressprogress.ca/corporate_canada_is_sitting_on_680_billion_85_canadians_say_raise_corporate_taxes

It's time to increase the corporate rate to get the economy moving again.

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I read an article yesterday about how in 2014 the average CEO made 300 times as much as their average worker. Just after WW2 this number was only 40 times as much as the average worker. That is a 260 times increase in 69 years.
If you want to know why corporations aren't investing in as much R&D anymore just ask their CEO's. Maybe it's high time we put a % cap on CEO earnings. Might see some of that money being put to good use within the company instead of being spent on a holiday home in the Caymans.
It takes the CEO of CPR 1.5 hours to make as much as the average Canadian ($46,634) He makes about 900 times as much as the average Canadian annually ($49,151,065).

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There was a precedent for lowering tax rates and increasing corporate investment, and that was Ireland. When they dropped the rate to 10%, it was so much better than Europe - but still gave companies full access to the Euro market - that they rushed by the hundreds into Ireland and turned the moribund economy around overnight. Everyone else seems to have just accepted the Irish experience as a general rule.

HOWEVER: to just assume that Canadian corporate savings/reserves are the RESULT of lower tax payment is extremely flawed reasoning. Believe it or not, taxation is not what companies are in business for, and they actually have to operate from with what they believe is the best interests of shareholders within the marketplace that exists, as well as plan for strategic opportunities (that means need cash)

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I read an article yesterday about how in 2014 the average CEO made 300 times as much as their average worker. Just after WW2 this number was only 40 times as much as the average worker. That is a 260 times increase in 69 years.

I see I have to learn to work this site tools properly....sorry

actually that is 300/40=7.5x increase

If you want to know why corporations aren't investing in as much R&D anymore just ask their CEO's. Maybe it's high time we put a % cap on CEO earnings. Might see some of that money being put to good use within the company instead of being spent on a holiday home in the Caymans.

What it takes to pay the CEO ts is another issue altogether, and I doubt has anything at all to do with cash reserves being held. A CEO of a PUBLICLY TRADED company can do this with a billion in the bank or a nickel.

The problem is that we give a free ride to speculative gains, while taxing the crap out of dividends and real earnings. As a result, money is used to speculate on the stock value instead of earn profit from operations. As a result, corporate governance has shifted to people from the world of finance, not business. Hedge funds insurance funds, pension funds, etc. make their money not by investing in IPOs or POs (the only money that actually makes it into corporate hands) but merely trading the equities, commodities and derivatives. This allows them to bring in buckets of cash without adding any value and creating any wealth (merely redistribution), and that gives them large stock positions in public companies. They in turn appoint "finance friendly" directors, who hire "finance friendly" execs - all of whom then rob the shareholders blind with stock option plans and ridiculous compensation packages.

You are right on the money: it is out of control because it really means stealing from minority shareholders. In some other countries, very large companies are run by people who make a small increment of the income of their average employee. Even in North America, if you want to see a model of good management and fairness to shareholders - the CEO of Costco makes IIRC 10x the lowest paid employee's income. So PLEASE, don't someone tell me that the corporate boardroom and exec office is filled with supermen who are worth millions a year. They are nothing but employees. and deserve no more than reasonable compensation. If they want stock in the company, they need to be forced to BUY it with real cash of their own. This is one of the key components of the North American economy crashing into the dirt. People running companies should be there to serve the shareholder and customer, not themselves (or their cronies at the bank)

Edited by cannuck
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I think the point being missed is that Corporate tax rates in Canada have fallen in part due to the same tax rates declining in the US.

https://en.m.wikipedia.org/wiki/File:US_Effective_Corporate_Tax_Rate_1947-2011_v2.jpg

With NAFTA in place, many businesses have the option of where they want to set up business as we have recently seen with Burger King coming into Canada because of the taxes. As such it becomes a competition to attract these large businesses with lower tax rates.

Even if we wanted to raise taxes, we might not be able to as many large companies would just move their headquarters south and we would lose out on much more than we are by shaving the rates.

Edited by Accountability Now
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I read an article yesterday about how in 2014 the average CEO made 300 times as much as their average worker. Just after WW2 this number was only 40 times as much as the average worker. That is a 260 times increase in 69 years.

If you want to know why corporations aren't investing in as much R&D anymore just ask their CEO's. Maybe it's high time we put a % cap on CEO earnings. Might see some of that money being put to good use within the company instead of being spent on a holiday home in the Caymans.

It takes the CEO of CPR 1.5 hours to make as much as the average Canadian ($46,634) He makes about 900 times as much as the average Canadian annually ($49,151,065).

CEO pay isn't cash in reserve though. That's an expense that's paid out on top of what we're talking about here. These figures are literally money that companies have on hand and are not spending. Essentially they're sitting on a pile of cash and looking down at consumers, asking them why they're not spending even though their pockets are empty.

Edited by cybercoma
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HOWEVER: to just assume that Canadian corporate savings/reserves are the RESULT of lower tax payment is extremely flawed reasoning. Believe it or not, taxation is not what companies are in business for, and they actually have to operate from with what they believe is the best interests of shareholders within the marketplace that exists, as well as plan for strategic opportunities (that means need cash)

Yet there's nearly a 90% positive correlation between CIT and R&D spending. There might be some external variable influences that cause both CIT and R&D spending to increase at the same times. I'd like to hear it if anyone knows what that might be. That's a fair question that arises out of these findings.

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