Business tax cuts don’t spur more capital spending, study shows
TheStar.com – business/companies
Published On Wed Apr 13 2011. Tony Van Alphen, Business Reporter
The raging election debate about the impact of more corporate tax cuts intensified Wednesday with a study showing capital spending has declined as a percentage of Gross Domestic Product despite continuing reductions in business levies.
Historical economic data from Statistics Canada reveals business fixed capital spending has dropped slightly as a percentage of GDP and as a share of corporate cash flow for almost three decades, according to the study by the Canadian Centre for Policy Alternatives, an Ottawa-based non-partisan, non-profit research agency.
The decline came despite continuing business tax cuts that have slashed the combined corporate federal-provincial corporate rate from 50 per cent in the 1980s to 29.5 per cent in 2010, according to the study, which The Star obtained and the centre will release this morning.
Furthermore, the study, which used mathematical and statistical techniques, concluded there is no proof that lower corporate taxes stimulate more investment.
“…The long-run rate of business investment spending slowed in Canada beginning in the 1980s and has not rebounded since that time despite the repeated episodes of corporate tax reform that have occurred since,” said economist Jim Stanford in the study, which he produced for the centre.
“As a means of stimulating growth, employment and even private business spending, the historical evidence suggests the business tax cuts are both economically ineffective and distributionally regressive.”
In the study titled Having their cake and eating it too, Stanford, economist for the Canadian Auto Workers union, said that means most of the income from the capital produced by the tax cuts goes to the country’s wealthiest people.
During the election campaign, the Conservatives have renewed their promise to reduce the federal corporate tax rate to 15 per cent in 2012 from 16.5 per cent this year and 18 per cent in 2010. They argue corporate tax cuts will boost job creation and competitiveness.
The Liberals, who dropped the rate when they held power from 28 per cent to 21 per cent between 2000 and 2004, want to move the rate back to 18 per cent which would help pay for new programs in the party’s campaign platform.
Meanwhile, the NDP has said it will keep the combined federal provincial corporate tax below the U.S. federal rate to ensure Canada is more competitive.
But the study’s conclusions sharply contradict the Conservatives’ view on the impact of tax cuts.
It revealed that before tax reforms in 1987, fixed capital spending as a percentage of GDP stood at 12.7 per cent. Since then, the rate reductions have not increased investments and actually pulled them down to 11.7 per cent of GDP.
But in the same period, after-tax cash flow climbed. As a result, the study said that as a share of available cash flow, the fall of investment spending is even more dramatic.
While it is impossible to trace excess cash flow, Stanford said it is undeniable that companies have been consistently taking in far more than they are reinvesting in capital spending, partly because of successive reductions in corporate taxes.
“In that context, accentuating that cash flow through further tax reductions certainly seems like pushing on a string,” he said. “It is highly likely that these tax reductions would only add to the large sums of uninvested cash flow already being received by Canadian businesses.”
Stanford, whose union is urging members to vote for NDP and Liberal candidates, said in the study that the Conservative plan to reduce corporate tax rates from 18 to 15 per cent will cost the government $6 billion annually but only stimulate about $600 million of new business investment a year.
He said Ottawa would generate far more in investment by investing the money in infrastructure improvements.
“From a policy perspective, government would elicit ten times as much new investment by allocating the same amount of money directly to public infrastructure investment,” he concluded in the study. “In addition to the $6 billion in incremental public investment directly financed by such spending, this strategy would also elicit $520 million in new private investments thanks to the positive investment of stronger GDP growth on business investment.”
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