Do we really want to ‘look more like Ireland?’ [corporate taxes]

Posted on February 24, 2011 in Policy Context

Source: — Authors: – news/Canada
Published On Thu Feb 24 2011.  Les Whittington, Ottawa Bureau

Shortly after rolling out the Harper government’s first budget in 2006, a boisterous Finance Minister Jim Flaherty was asked during a visit to New York what Canada would look like in five years under a Conservative majority regime.

“It will look more like Ireland — more dynamic, more attractive to investors, brighter, more positive, outward-looking,” Flaherty said in a published report of his comments.

Perhaps in part due to his Irish heritage, Flaherty has long been a fan of Ireland’s fundamental economic strategy — rock-bottom corporate income tax rates.

But with Ireland’s low-tax Celtic Tiger now dead, the Harper government no longer cites the Irish example to promote corporate tax cuts in Canada. Nonetheless, despite the dire state of Ottawa’s finances, the Conservatives are sticking to the low-tax policy pioneered in nearly bankrupt Ireland.

Over the past two decades, Dublin reduced taxes on corporate profits to 12.5 per cent, one of the lowest rates in Europe. This approach helped lure foreign investments by some of the world’s largest multinationals. Along with financial help from the European Union, the influx of overseas investment transformed once-poor Ireland into the economic miracle touted since the mid-1990s as the Celtic Tiger.

But the boom times are long gone for the Irish, who head to the polls in a general election Friday. Now they are coping with a debt-burdened government and dismal business conditions after a recession touched off by bank failures and the collapse of a sky-high housing bubble.

The jobless rate is stuck above 13 per cent and the Irish face years of cuts in government programs and higher personal taxes. Outbound migration, long a measure of the country’s fortunes, is on the rise again.

In November, Dublin was forced to accept a humiliating $114-billion rescue package from the EU. And, to the Europeans asked to put up billions in bail-out money, Ireland’s low corporate tax rate has become a source of intense irritation. German Chancellor Angela Merkel and French President Nicolas Sarkozy have gone so far as to say that Ireland should raise its tax on corporate profits out of fairness and to rein in its huge debt.

Enda Kenny, leader of the Fine Gael party, is given a good chance of taking power in Friday’s vote and ousting the conservative Fianna Fail party, which presided over the country’s economic debacle.

In Canada, Flaherty doesn’t talk about imitating the Irish miracle these days but his faith in the rewards of low corporate taxes is still burning bright. He floated the idea of matching Ireland’s tax advantage in a 2006 strategy paper. And in 2007, the Tories moved to gradually reduce the corporate income tax rate from 22 per cent to 15 per cent in 2012.

According to the latest publicly available figures, the corporate tax breaks will cost Ottawa $14 billion in lost revenue by 2012.

Opposition parties say this makes no sense when the federal government’s finances are in disarray, with a forecast two-year budget deficit totaling $101 billion.

But the Conservatives cite a study by the University of Calgary’s Jack Mintz that predicts more corporate tax cuts would raise employment by 100,000 in seven years. And Flaherty argues that slashing corporate income taxes will make Canada a magnet for economically beneficial foreign investment.

Whether that strategy works is up for debate. In a study last month by the Canadian Manufacturers & Exporters association that supported low business taxes, the CME nonetheless said, “Over the past decade, reductions in Canada’s effective and average combined statutory corporate tax rates have had little observable impact on net flows of foreign direct investment” into Canada.

Economists note the corporate tax rate is only one of a range of factors influencing businesses investments, including a country’s education levels, natural resources and other characteristics.

As for spurring on the economy, reducing corporate taxes has only a negligible affect, Parliamentary Budget Officer Kevin Page says.

And a finance department study last year concluded that, for creating jobs in the short-term, corporate tax cuts were the weakest option when compared with investment in infrastructure, housing and other programs.

And there’s no proof that businesses will re-invest profits in job-creating activities. A recent TD Bank report said that, despite a return to profitability after the recession, Canadian corporations were sitting on buckets of cash last year waiting to decide whether to make the investments in machinery and equipment needed to jumpstart the economy.

The belief that lower business taxation automatically leads to significant job-creation, even in the long term, is “a leap of faith,” said Bruce Campbell, executive director of the Ottawa-based Canadian Centre for Policy Alternatives. “I think it’s more ideologically driven than driven on the basis of empirical evidence.”

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