Thursday, January 26, 2012

The Failure Of Corporate Tax Cuts

Corporate tax cut disciples will ridicule the messenger, Canadian Labour Congress just reeks "enemy of the state", but their study on corporate taxes is largely reliant on third party conclusions, ROCK SOLID empirical manifestations, that deserve consideration. What is presented is a clear and concise picture of the utter failure of corporate tax cuts to deliver the benefits as previously argued. That a large segment of economists and apologists can still play offence on corporate tax cuts is mystifying, given data which is supposed to be the underpinning of their arguments contradicts their entire rationale.

CLC finds the promised investments have never come, in fact we've seen an erosion on this front, DESPITE record profits and cash balances. I am pleased to see the CLC look into corporate dividends, a development I have argued is ripe for reform. The CLC report finds that corporations are simply redirecting their corporate tax cuts "savings" back into shareholder hands, rising dividends siphoning off the cash that was supposed to lead to more reinvestment, further EXACERBATING
the widening societal gaps:
As noted above, corporate tax cuts are not supposed to be an end in themselves. The tradeoff for lower corporate tax revenue was supposed to be higher capital investment leading to higher growth, more and better jobs, and improved productivity. Proponents argue that as companies make more money because tax rates are lower, they will invest more in capital stock. That is to say, they will buy more factories and more computers to make their companies more productive. Canada’s lagging productivity will be pulled up.

Given the significant drop in corporate tax rates since 2000, what effect can be seen? Figure 1 — based on the last column of Table 2 — shows the percentage of profits that have been simply paid out to investors as dividends instead of retained and reinvested in the company. In 2000, corporate Canada was paying out 30% of its profits to shareholders in the form of dividends.

While the effective tax rate has declined significantly since 2000, companies are doing the opposite of investing: they are paying an even larger share of their profits out as dividends. In 2010, for every dollar in after-tax profits, 49 cents was paid out directly to shareholders, and the share was even higher in the recession year of 2009. Much of the increase in after-tax profits coming from corporate tax cuts that corporations said would be invested to boost productivity is, instead, being paid out to those who own dividend-paying stocks in Canada’s largest companies. About one half of all dividends are paid to taxpayers earning more than $150,000 per year.

What you see is a clear regime, where elimination of corporate taxes has lead to increased cash balances which have been redirected to shareholders. Defenders of corporate tax cuts get quite upset when critics point to rising CEO salaries, there is no co-relation, simply a function of a job well done. HOWEVER, CEO's and high ranking corporate officials ALSO have huge stock options, holdings, so any increase in dividends is effectively a big increase in salary. Couple this fact with certain tax regimes on dividends, and it's a big win for corporate executives! Rather than invest, corporations are merely redistributing their riches to themselves and their friends, this fact is irrefutable.

The study finds a 13 billion dollar revenue shortfall in corporate taxes since this government took office. As an aside, I did support some corporate tax cuts- to a level which made us competitive with other nations- that seemed a sound goal given the global economy. CLC confirms what we already know, Canada is now incredibly competitive, perhaps the lowest corporate tax regime, depending on your metrics. What emerges is a policy which has gone too far, balance has been lost, in a irresponsible race to the bottom mentality. Given government's have also incorporated the HST, the entire thrust of which was business friendly, it is fair to ask when enough is enough. There is now a huge revenue shortfall which must be addressed, and unfortunately it looks to be achieved on the backs of ordinary Canadians.

All in the talk in Ottawa these days is about austerity, there WILL be massive public service job cuts. Given there is NO evidence of a private sector job creation offset, we will have a circumstance of NET job losses under this corporate tax cut regime. Proponents will say corporate tax cuts were never argued to create jobs. Accept that assertion as true- the evidence does show no job creation- and you are left with cutting taxes so you can layoff public service employees. That is the sorry bottom line, from which we find ourselves today, no investment, no jobs, job CUTS, the rich getting richer and services under attack. That isn't spin, that is a very coherent reality, supported by all the facts available, while proponents are left to economic theory and "you just wait" proclamations.

The biggest beneficiaries of corporate tax cuts are Canadian banks. Google "bank job cuts" and you will see a consistent pattern over the last decade. Then google "bank dividends" or "bank record profits" and you will see another clear picture. Not anti-bank, not resisting the idea that a strong banking system isn't imperative, merely a realization that BALANCE has been lost, we have lurched so dramatically to one side of the equation that we created an environment which is actually detrimental to the "greater good". Go back in time, review all the arguments for corporate tax cuts, and if you can find any scenario which foresaw record cash flows and profits, massive increases in dividends, at the same time as lagging investment and productivity, job losses, I'm ALL ears.


Frunger said...

"redistributing their riches to themselves and their friends"

Actually, dividends get paid to 'investors' or 'shareholders' of which "themselves and their friends" make up a very small percentage.

The rest of it is made up of the middle class' investment portfolios, RRSPs and pension plan holdings.

Paying dividends helps us all, not just the CEO and the board.

We can only hope that Obama continues his assault on Corporate America and the 'rich'. We should welcome them and their head offices here.

Steve V said...

Thank you for the grade 9 level tutorial on dividends. Perhaps READING the post and study would help, miss the part about who benefits MOST from dividends?

sharonapple88 said...

The rest of it is made up of the middle class' investment portfolios, RRSPs and pension plan holdings.

In terms of mutual funds and acitively managed pension plans, high fees, the MER, can eat into dividends for investors. Anyway, this is another way the banks/financials manage to funnel money to themselves.

(Yeah, they're managing your money, but the majority of managed funds don't beat the market. What we're paying for might not be worth half as much as they're asking.)

Steve V said...

Here's a good link for understanding who benefits the most from dividends:

Peter said...

I'm not sure what your ultimate point is. If increased profits from a coporate tax cut are paid out to shareholders, then they are taxed as dividend income and the combined shareholder dividend tax rate and new corporate tax rate is at least equal to, and I think more than, the old corporate tax rate. Where is the loss to the government?

Isn't the argument usually that the tax savings just sit in a bank or are sent offshore?

Steve V said...


Jerry Prager said...

A post Liberal-past liberal Steve, I know the fact the Chretien gained power via a lie about getting rid of the American free trade deal, but I think all the evidence about the corporate economy in general points to corporate fail, hashtag delete,, please liberals, denounce neo-liberalism as a corporatist conspiracy against liberalism, and come out in defense of a retooled responsible/partnership/cooperative enterprise, with liberty for both individuals and the community at large.

Jerry Prager said...

The thing about corporate executives is that they all sit on one another's boards of directors, granting one another inflated wages. It's a giant scam. I believe with St. Paul that there is no salvation in law, even tax law, but if I was a shareholder, I'd be gutting this practice with a fish knife.

Carmichael said...

Steve, I guess you didn't know there were so many CEOs and corporate executives reading your blog.

Or perhaps there are just millions and millions of middle class idiots who take the sides of CEOs and corporate executives because they have no fucking idea what their own best interests are.

JimmE said...

What if we hiked taxes on companies (like mine) then allowed tax breaks to a floor based on investment in innovation? Establish clear rules to limit the cheats.
Oh & Frunger, so you know. Many large multi nationals pay minimum tax here as a result of HEAD OFFICE charges...located in TAX HAVENS.

Tof KW said...

Or perhaps there are just millions and millions of middle class idiots who take the sides of CEOs and corporate executives because they have no fucking idea what their own best interests are.


Since the Reagan/Thatcher era, the middle-class has been brainwashed into thinking that corporations should be given everything they want, in exchange for the jobs they supposedly will provide. Libertarian-corporatism needs to be exposed for the scam that it is.