Wednesday, April 06, 2011

But In Theory

The corporate tax debate tends to get bogged down by scholastic jargon, the Liberals on the defensive as many "experts" weigh in with their economic theorems, theoretical realities that SHOULD pan out apparently. Trouble is, for those pounding the table on corporate taxes, the arguments are OBLITERATED in the face of the real world data. According to Statistics Canada, not only have corporate tax cuts failed to deliver to the economy as advertised, about all they have done is lead to HOARDING, no trickle down, no job creation, furthering the gap between rich and poor. It's almost remarkable when you think of the sales job on the benefits of corporate taxes:
But 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. At the same time, the analysis shows, businesses have added $83-billion to their cash reserves since the onset of the recession in 2008.

But the tax cuts appear to have reversed decades of tradition. Investment in equipment and machinery has fallen to 5.5 per cent in 2010 as a share of Canada’s total economic output from 6.8 per cent in 2005 and 7.7 per cent in 2000, The Globe analysis shows.

A pretty telling graph, not only does investment not increase it GOES DOWN, despite being awash in cash. Theory gets a kick in the sweets:


The exact opposite should occur, and yet the graph is striking. Now proponents would say EVENTUALLY companies will get off their stockpile of cash and invest, but again where is the basis in fact? Factor in more money going to the top 1% of our society, and something doesn't quite jive.

Another argument, that the corporate taxes lead to job growth, apart from simply re-investing, companies hire people because of improved balance sheets. The biggest benefactors of corporate tax cut decreases are the big banks, accounting for a sizable percentage of the overall cuts. I recommend people google "banks slash jobs", "banks cut workers", etc, what you will find absolutely no job creation, just hoarding cash while STILL TRIMMING payrolls. It really is quite remarkable, basically nothing the incredibly intelligent economists suggest has actually manifested itself. It's the equivalent of the weather man calling for muggy, warm weather and instead we have a blinding snowstorm, reality bears no relation to the forecast.

17 comments:

Jason Cherniak said...

Here's a thought for you (not sure if it works, since I just thought of it). The lower the corporate tax rate, the higher the incentive to make profits. If corporate taxes are higher, then companies have an incentive to grow and try to increase their overall size so that they are dealing with larger revenues. The problem would be if they leave the jurisdiction, so it's a balancing act.

Steve V said...

Another aspect, corporations sitting on all this cash are under pressure to increase dividends for shareholders. So, rather than the money going to create jobs, machinery, it is being re-directed in the form of dividends.

bubba said...

This does not account for companies moving to Canada to benefit from the Tax rate. How many companies are located in Canada today compared to when the rate is higher? If 100 companies move to Canada to hoard money they still bring employment. As far as I can tell there is no accounting for attracting new companies.

bubba said...

I am thinkin of Tim Hortons , Target , kroegers and many more. These are real jobs and the tax rate definitely has som impact on their choice to operate in Canada.

Michael said...

@bubba

I think you have to take into account a degree of substitution. Target, Kroegers and Walmart are moving into Canada, but they are transferring employment from grown in Canada retail firms to foreign firms that likely repatriate part of their profits to shareholders in the States. Certainly Canada benefits to some degree, but domestic firms suffer. The increased competition is great for the consumer, but from an Economic perspective I'm not exactly sure how the benefits extend, as jobs have merely been transferred from a company like Loblaws to Walmart.

Kirk said...

But...but...but by creating an economic model on a computer and plugging some numbers into it economists have shown that the opposite is true!

There was a time when economics was the study of the economy but even in the late 70's to obtain an economics degree you didn't even have to take a single economic history course (and only one was offered). I took that course and it told me a lot more about the economy than most of the other 10 economics courses I completed to get my degree.

Too much of economics is about "predictions" and we would all be better served by economists if they looked more at the past and recent past to obtain an understanding of the subject.

Kirk said...

Walmart moved into Canada in the 90's before the Liberals started to lower the tax rate. Target is looking to Canada to expand it's overall operations and to diversify into another market that is growing faster than the US and has weak competitors for it.

Again if you look at the data instead of trying to jam "facts" into your theory, even an ad hoc theory posted on a blog, you get a better picture.

Omar said...

Tim Hortons, Target, kroegers and many more. These are real jobs..

Hahaha..these are real jobs are they? These companies offer positions that are little more then corporate slavery. They do not pay a living wage, have few benefits and in Walmart's case violate many workers' rights. Discriminating against the disabled, sexual discrimination, lack of health care coverage, and unpaid overtime are just a few of Walmart's claim to societal fame. Walmart's tax revenue contribution is something we would be bettor off doing without.

Steve V said...

Let's not forget the HST, which was implemented to benefit business. Also, our health care system is VERY attractive to employers.

I'd add, none of these economists knows how you address the empirical evidence that shows a widening gap between rich and poor.

Kirk said...

Companies moving to Canada wouldn't result in the amount of investment in machinery and equipment falling as a percentage of GDP unless the companies are moving to Canada but not equipping their workers at at least the same rate as previous companies in Canada were. In a first world country most companies try to leverage the high cost of workers by maximizing their output with technology that our well educated work force can use effectively. If it is a labour intensive sector, relative to the required investment in equipment per worker, we have seen these jobs move overseas for years now to take advantage of lower labour costs.

Given the massive capital costs of developing the tar sands these numbers mean that even with that strongly growing industrial sector we are still not showing gains in capital investment that were promised to be the result from the lower corp. tax rate. Indeed the resource sector has been strong in Canada throughout most of the last decade and those gains are the result of world wide demand for resources not the tax rate. So we have a strong trend in Canada to increase capital investment outside of any issue with the corp. tax rate and yet we are seeing an overall decline in such investment.

bubba said...

Tim horton' head office is hardly the low end jobs you say. Likethis is an article that allows for 0 credit for growth. If gdp rising 3 times faster than the rest of the world and investment is 2% less than before we are definitely ahead because of the cuts. You cant write the article and be accurate without comparing growth rate. Is anyone here saying otherwise?

Mark Dowling said...

Stephen Gordon (Laval University)
http://www.theglobeandmail.com/report-on-business/economy/economy-lab/stephen-gordon/corporate-tax-cuts-a-look-under-the-hood/article1972965/

"An examination of corporate tax cuts and growth in today's Globe and Mail notes that even though corporate income tax (CIT) rates have been falling since 2000, the share of nominal expenditures on investment in machinery and equipment of nominal GDP fell instead of rising.

Unfortunately, the analysis has a couple of problems that should be noted."

Steve V said...

Thank Mark, I read that as well. It reads like someone scrambling to tell the blue sky is really red.

brebou said...

It's a mantra that lowering corporate tax rates will result in more investment and more job creation. But that's not a given.
What the corporations do with their higher profits is their choice, and many are choosing to pay their executives outrageous salaries, bonuses and pensions.
At the very least, with less taxation and higher profits, these companies could be passing it on to the employees in the forms of higher wages, better benefits, better pensions.
Kinda like the HST. Companies stand to gain millions on the HST changeover, and presumably will pass the savings on to consumers via lower prices. So laughable.

Miles Lunn said...

I support lower corporate taxes myself not so much as I agree it will lead to more investment and more jobs, but rather corporations usually plan about a year or two advance so if the government raises corporate taxes back to 18% that could mean layoffs and higher prices. I work for a large firm that would be affected and every year they show how well the company has done. A better solution might be to raise taxes on those who outsource or ship jobs overseas while cut them for those who create them in Canada. This is what Obama proposed and while it realize the technical difficulties, politically that would be a huge seller saying we will cut taxes for those who create jobs in Canada while raise them for those who ship them overseas. Also in comparison to the OECD, we are middle of the pack if you combine federal + provincial taxes. We are lower than most federations but higher than most unitary states and due to Canada's size and diversity a unitary state might save money, but it probably wouldn't work, whereas in countries that are more ethnically homogenous and could easily fit into anyone of our provinces multiple times, it can work (i.e. most European countries, the Far East save China). This is due to economies of scale as having one level of government is cheaper than having two where you will get some overlap.

Miles Lunn said...

I should add, I would prefer they raise the GST back to 7% rather than raise corporate taxes. Our sales taxes are actually quite low amongst the OECD. The US does have higher corporate tax rates but they also are the only OECD country without a VAT. In fact, this would be the best thing Obama could do to reduce the deficit, but he would probably lose in 2012 if he did it. Also offshore outsourcing is far more ramptant there than any other country. If you call about your credit card or even book airplane tickets, it is like done in India not the US, while most goods are made in countries like Mexico or China. I don't know about Canadian tax law, but I know in US tax law, they are not taxed on profits made in other countries so long as they don't return them to the US.

Jerry Prager said...

According to my son, when you're playing Sim City corporate tax cuts do nothing for the economy but crash it.