Minzbergism versus corporate tax cuts

NationalPost.com – FinancialPost/FPComment – Globe, Henry Mintzberg mangle tax-cut economics
Apr 11, 2011.   Terence Corcoran

Defenders of corporate tax cuts are busy marshalling their wonkish arguments, writing earnest op-eds and otherwise banging their heads against the ideological brick wall erected by the anti-corporate media. It’s a tough slog. Among other things, it means wrestling with the front page of The Globe and Mail, taking on the leftist Canadian Centre for Policy Alternatives and engaging in combat with veteran anti-capitalist gurus such as Henry Mintzberg.

It’s an extra tough slog because the opponents of corporate tax cuts have three factors working in their favour: they have total disregard of facts and statistics, they have an easy willingness to misrepresent data, and they maintain a blockheaded determination to misunderstand the economics of tax cuts.

To demonstrate: Last week The Globe and Mail “crunched the numbers,” to use its phrasing, and came up with a headline: “Corporate tax cuts don’t spur growth.” As evidence, the story claimed “an analysis of Statistics Canada figures by The Globe and Mail reveals that the rate of investment in machinery and equipment has declined in lockstep with falling corporate tax rates over the past decade.”

Corporate tax rates in Canada dropped from 42.6% in 2000 to 29.5% in 2010. Corporations were supposed to use their increasing after-tax profits to boost investment in machinery and equipment. To prove they didn’t, the Globe published a table showing business investment in machinery and equipment had declined over the period from 7.7% of GDP to 5.5% of GDP (see top chart in graphic).

Within hours of publication, the Globe had a response — on one of its online sites — from Stephen Gordon, professor of economics at the Université Laval à Quebec. “Unfortunately,” he said politely, “the analysis has a couple of problems that should be noted.” The biggest problem was that it totally misrepresented the data, a point Prof. Gordon demonstrated by producing his own graph, based on “real” investment numbers measured against a real measure of Canada’s gross domestic product.

By using nominal-dollar measures of GDP and investment, the Globe failed to account for the rapid rise of the Canadian dollar during the period, along with falling prices of machinery and equipment. Canadian business, in other words, had dramatically increased spending during the period (see bottom chart in the graphic). Prof. Gordon points out that the rising level of real investment does not mean that the corporate tax cuts were a cause of increased investment. There is no necessary cause and effect — although as after-tax profits increase in part due to lower tax rates, corporate investment did rise.

So far, the Globe has not acknowledged the problems in its story. Meanwhile, theToronto Star liked the Globe’s version of the corporate profit story so much it wrote an editorial the following day decrying the fact that investment “has actually declined steadily over the same period.” The pinko Star, in perpetual agitation about a possible Conservative election victory, also liked another Globe bit of statistical flim-flam. Since 2008, Canadian corporations had accumulated $83-billion in cash — as if building cash reserves were the equivalent of throwing profits into a pit in the basement. The fact that corporations have billions in cash is apparently evidence that they don’t need tax cuts on profits since they can’t even spend the profits they are making.

But cash is not profit. Lehmann Brothers had $20-billion in cash just before it crashed. For all we know, every dollar of the $83-billion in cash held by Canadian corporations is security against outstanding bonds or bank loans. Cash is just another gross asset owned by a corporation, not a pile of old profits sitting like dead wood in retained earnings—unless you’re writing for the Globe and the Star.

Another purveyor of crackpot economics on corporate profits is the Canadian Centre for Alternatives to Good Policy — as we know it around here. It produced a report last week claiming that while the profits of 200 top Canadian corporations rose sharply over the last decade, they failed to create jobs. The union-backed centre said that the $12-billion corporations saved per year in lower taxes had produced virtually no new employment at those same corporations.

The idea that one corporation’s profits should produce new jobs in that corporation is another economic fallacy. Profits invested in machinery and equipment may simply support existing employment at the corporation, although jobs may increase among the makers of machinery and equipment.

With all these anti-corporate tax cut ideas flying around, it was hard for the CBC’s Sunday Edition radio show and its host, Michael Enright, to resist getting into the debate. Not by challenging the points raised by the Globe and the Centre for Alternatives to Good Policy, but offering them up as bones for McGill University management professor Henry Mintzberg to gnaw on approvingly and add his own extravagant analysis of the corporate tax issue.

Prof. Mintzberg is a McGill management guru who slices his ideological toast somewhere between Karl Marx and Adam Smith, with not much Smith remaining on the plate at the end of the slicing. He had little good to say about corporate tax cuts, claiming that he knew full well how corporate boards and executives behaved and they would do nothing good with any tax “windfalls” that might fall into corporate tills.

As Mr. Enright fed him the fictional data from the Globe et al. — no new investment since tax cuts, billions in cash sitting on the books, annual costs of $12-billion — Prof. Mintzberg rattled out his own theories about how corporations spend money and how corporations run the world and how corporate taxes should be increased.

Corporations, said Prof. Mintzberg, don’t spend time thinking about corporate tax windfalls. “Nobody’s sitting in a boardroom and deciding to price a product or introduce a new product because the taxes are higher or lower. That’s really hard to believe.” Do tax cuts create jobs? Hard to believe, said Prof. Mintzberg. Do corporations pass taxes on to consumers, as Finance Minister Jim Flaherty claims? Shocking suggestion, said Prof. Mintzberg. “Taxes are taxes essentially on the shareholders. They are not a tax on the customers…. This idea that somehow this feeds back [into corporate decision-making] is complete nonsense. And coming from a free-enterprise party, it’s really laughable.”

Prof. Mintzberg is not an economist, and he readily conceded that he has not looked at any statistics on corporate tax payments. All he knows, he said, is that they are paying less by constantly engaging in “blackmail” of governments. Paradoxically, while he said corporate boards are uninterested in taxes in their investment decisions, they employ “thousands” of lobbyists and tax experts to get their tax rates down.

Management gurus should stay away from economic declarations. The idea that shareholders pay corporate taxes is a misunderstanding held by even bigger minds than Mr. Mintzberg. Shareholders assess their investments on the basis of long-term after-tax net profits. Shareholders will make that money, in a market economy, come hell or high water.

In a market economy, a tax on profits forces a corporation to make more pretax profits to increase net after-tax profits. To increase pretax profits will mean either higher prices or, more likely, reduced spending — on wages, machinery, equipment — to boost profits. When the government raises taxes, it takes away money for wages and investment. If it cuts taxes, it makes more available for wages and investments. Or it might free up money for dividends, which would then be taxable in the hands of shareholders.

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1 Comment

  1. I do not think that corporate tax cuts is the way to go.

    I live in London, Ontario. I can tell you that in the last 10 years this city and the SW Ontario have been hit very hard by the loss of good jobs. Those jobs mostly have been replaced by low wage jobs with no benefits and no future.

    In addition to that, 10 years of big cuts on jobs and services in health care and education are making things even worse. Not only for the loss of jobs in the public sector, but also because the ability of the government to deliver those services has been crippled.

    It doesn’t take took much to understand what it is happening to us, ordinary citizens.

    In the last 10 years our wages have been steadily dropping; employment is more scarce, and the services we receive from the different levels of government have been deteriorating year after year, cut after cut. In short, our standard of living today is lower that it was 10 years ago.

    To me, corporate tax cuts in the last 10 years have miserably failed to attract investment and create jobs in Ontario. In addition to that, they have represented a huge loss of revenue for both federal and provincial governments. That is what I see, feel and taste.

    Your expert opinion conflicts with the reality I see and I live. To me, the people you criticize are actually doing a better job in explaining my current reality and that of many of my fellow Ontarians.

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