Corporate tax relief no ‘magic’ solution: Ignatieff

NationalPost.com – news/economy
Wednesday, Jan. 12, 2011.  Paul Vieira, Financial Post · Ottawa

Liberal Leader Michael Ignatieff tried to debunk Wednesday findings from the Canadian manufacturing lobby on the positive impact corporate tax cuts would have on employment levels and business investment, saying tax relief does not represent a “magic” solution.

Cutting business taxes would do nothing more than fatten corporate profits, he told reporters on Parliament Hill ahead of a tour of 20 ridings he is set to visit, with the hopes of winning those seats in a coming election, whenever that may be. He was reacting to analysis released by the Canadian Manufacturers and Exporters that called on Ottawa to press ahead with corporate tax cuts as planned because the measures stand to create in 2012 alone 49,000 jobs, spur new investment of roughly $3-billion and add $440 to individuals’ wallets.

“Corporate tax cuts don’t necessarily create jobs. They add to [corporate] bottom lines and don’t necessarily create investment,” Mr. Ignatieff said, adding later tax cuts are no “magic” job creator.

“I will tell you what creates jobs and investment. It is investment in education and investing in maintaining the standard of living of middle-class Canadians.”

The Canadian Manufacturers and Exporters released its findings on the economic impact of tax cuts – clearly becoming a political hot potato in the House of Commons — as part of its 2011 economic outlook, in which it predicted the sector would expand at a faster pace than the overall economy, as it did in 2010.

The CME said manufacturing production grew by an estimated 5.7% in 2010, marking the first year of expansion for the sector in a half-decade. The sector is expected to advance by another 5% in 2011, whereas the overall economy — weighed down by an overstretched consumer, softer housing market and less government spending — is likely to reach only 2% growth this year.

Furthermore, manufacturers’ investment on new machinery and equipment is set to accelerate in 2011 by an estimated 16%, outpacing the 10.7% growth recorded in 2010. The Bank of Canada has said investment in capital spending by businesses must be a key driver for the economy in the coming years.

But Jayson Myers, president of the CME, said business investment expansion is partly conditional on the federal government following through with its plan to reduce the tax rate on corporate income to 15% in 2012. But the Liberals are ratcheting up the rhetoric over corporate tax relief, potentially making it the issue that will spark an election once the minority Conservative government tables its budget.

The Liberals have pledged that, if elected, corporate tax levels would be scaled back to 18%, or 2010 levels. The Conservative government started cutting corporate income tax in 2007 when the rate was 21%. It was cut to 16.5% for 2011, and is scheduled to go to 15% next year.

“The question is not if we afford can corporate tax cuts. It’s can we afford not to make tax rates in Canada competitive with the rest of the world. The answer is simple – corporate tax cuts are good for Canada and Canadians,” Mr. Myers said.

In its own separate analysis on the tax reductions, the CME said taking the federal rate down to 15%, as planned, would bring the combined federal-provincial tax rate to 25% — which would allow Canada to “catch up” with the rest of the world and remain competitive with the United States in terms of how much profit, on a percentage basis, firms actually keep once all taxes are paid, and all deductions and allowances are pursued.

Furthermore, the CME analysis indicated that if fully implemented as planned, the corporate tax reductions would in 2012 increase after-tax profits by 5.3%, or $6.2-billion; lead to 49,900 net new jobs; make an additional $3.1-billion available for business investment; and boost GDP on a per capita basis by $440. The impact is bigger when 2011 is incorporated.

“I don’t think the average Canadian is going to take issue with a business measure that creates 49,000 new jobs and an additional $440 in their wallet,” Mr. Myers said. “It’s good politics and even better policy.”

Mr. Ignatieff, meanwhile, said there was no evidence backing up the CME’s claims.

The CME’s calculations are based on assumptions that, over the next two years, the Canadian economy will grow in nominal terms (GDP plus inflation) by an average 4.5% annually, and pretax corporate profits increase at an average annual rate of 10%. Furthermore, the provinces that have also pledged to cut their corporate taxes in tandem with Ottawa follow through on their promise.

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