Tax-cut debate almost laughable

MontrealGazette.com – news
February 8, 2011.    By Jay Bryan, The Gazette

It’s almost laughable that we could face a federal election this spring based on an issue that has almost nothing to do with the ferocious political argument it has sparked.

The issue is corporate income tax cuts, a topic that understandably raises the hackles of those who’d like to tax fat cats in order to support worthy social programs.

Count Liberal leader Michael Ignatieff among these. He complains the cuts are a gift to big corporations at the expense of social programs.

On the other hand, the Conservative government of Stephen Harper is suggesting that lower corporate taxes could create a bonanza of new employment.

Score so far: zero to almost zero.

Ignatieff’s effort to portray corporate tax cuts as a windfall for the rich and powerful is not only misleading, but I’m afraid deliberately so.

Anybody with the Liberal leader’s list of lofty intellectual accomplishments knows the basics of tax policy: that corporate income taxes aren’t paid by corporations nor are they paid by fat-cat corporate executives. They’re simply passed on by corporations in the form of lower salaries for workers or higher prices for consumers.

On the other hand, corporate income taxes have very little to do with employment, notes Universite Laval economist Stephen Gordon. Why? Because while cuts in corporate income taxes do increase the amount of money corporations have available, they don’t change the availability of qualified workers.

Corporations left with a bit more money in their pockets will spend on exactly the mix of equipment and labour that boosts their fortunes the most, boosting both competitiveness and wages, but doing very little to change employment over the long run, Gordon points out.

Even a widely cited study showing 100,000 new jobs enabled by the corporate tax cuts doesn’t do much to prove the contrary.

That’s 100,000 jobs over a decade, or 10,000 per year. Canada created 369,000 jobs last year, so the impact isn’t much.

And that’s fine, because Canada is headed for full employment within a couple of years anyway, calculates chief economist Glen Hodgson at the Conference Board of Canada.

What we really need is more competitive, better jobs, and that’s something that lower corporate taxes stimulate very effectively.

When profits are taxed less, it’s more attractive to invest in this country, because the whole point of investing is to earn profits. Meanwhile, the investment boosts productivity by enabling Canadian workers to work with newer, better equipment.

“There’s not much point in taxing corporations at all,” says McGill University economist Christopher Ragan. If we want to squeeze fat cats harder, we can just hike income taxes on higher brackets.

So why do we bother? Perhaps, Ragan suggests, because it lets countries capture a bit of extra income from foreign corporations, whose profits don’t all flow into Canadian incomes.

Ignatieff knows that his complaints about the corporate tax cuts are silly, not only because he’s well-educated but because he’s Liberal, and this is actually a Liberal policy.

It began when a Liberal finance minister, Paul Martin, began slashing federal corporate tax rates 11 years ago, taking them from 28 per cent to 21 per cent in a five-year program.

Then six years ago, when Martin was prime minister, another round of corporate tax cuts lowered the rate to 19 per cent.

It was only then that Stephen Harper picked up the ball, simply extending this Liberal initiative by initiating the current series of cuts, which will take the rate to 15 per cent by next year.

Harper is no paragon of tax policy. His two-percentage-point cut in the GST, for example, is one of the classic boneheaded examples of playing politics with the tax system at the expense of sensible policy.

But his cuts in corporate income taxes make a lot of sense, and not just to right wingers, as demonstrated by the fact that it reflects policy in several of the world’s richest and most socialist countries.

As Gordon has pointed out, Europe’s Nordic countries, Sweden, Norway, Denmark and Finland, have much higher levels of social spending than Canada, but still have vibrant private corporations that produce lots of well-paid jobs.

Their policy: keep corporate income taxes low (they’re all lower than Canada’s total federal-provincial rate, although we’re getting close) and consumption taxes high.

Consumers will pay the high sales taxes because they have little choice, but they get much of this back through high incomes and well-funded social programs.

Harper, of course, sabotaged Canada’s chance to support social programs in this way by slashing the GST, and it is this, not the corporate tax cuts, that Ignatieff should properly be criticizing.

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1 Comment

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