OTTAWA — As the Conservatives sell their latest budgetary plan at home and abroad, Finance Minister Jim Flaherty is touting the benefits of five consecutive years of corporate tax cuts on the government's bottom line.
Flaherty told reporters in New York and Edmonton this week that government revenues from corporations continue to rise even as Ottawa cuts taxes.
"What we're seeing, despite the fact that we've reduced business taxes, is we're seeing our corporate tax revenue continue to rise. And this is further proof, if anyone needed it, that reduction of taxation creates more economic activity, more investment, more jobs," Flaherty said in Edmonton on Thursday.
But the numbers to date don't bear out Flaherty's assertion.
Ottawa collected $40.6 billion in taxes from firms during the 2007-08 fiscal year, a record high. It was also the year the Harper government began a schedule of tax cuts that saw the federal rate fall from about 22.1 per cent to the current 15 per cent.
With the onset of the recession and cut to the tax rate, revenues have yet to recover, even in non-inflation adjusted dollars. The three years following 2007-08 saw corporate tax revenues fall to $29.5 billion, $30.4 billion and $29.9 billion.
By the government's projections in this spring's budget, corporate tax revenues will start to inch up but won't approach the $40-billion mark again until 2016-17, a full nine years later and without adjusting for inflation.
What has returned to pre-slump levels, and even more, is the amount of cash corporations are holding -- about $250 billion more than in 2006.
Economist Jim Stanford of the Canadian Auto Workers says Flaherty is repeating the disproved Laffer curve argument popularized by President Ronald Reagan in the 1980s, that governments can raise revenues by cutting taxes.
"It's absolute statistical nonsense," he said. "The end result has been on one side a reduction in government revenue and on the other side, an additional increase in corporate cash hoarding."
Stanford does acknowledge that the tax cuts were not primarily responsible for the plunge in corporate tax revenues starting in 2009. He said the recession was the primary reason, but added without the cuts corporate tax revenues would be about $7.5 billion higher today.
Economist Jack Mintz, a respected expert on tax policy, said his research and others suggests that to maximize revenues, the effective corporate income tax rate should be somewhere between 26 and 28 per cent. With provincial rates included, it is at about 27 per cent today in Canada.
He argues that, discounting fluctuations for both booms and busts in the economy, corporate taxes as a share of the economy have not fallen or risen appreciably since 2000, even though the combined federal-provincial corporate rate was cut from 43 per cent to 27 per cent during the period.
"Why? Because multinationals are taking profits out of high tax countries like the U.S. and shifting into Canada," said Mintz, a professor of economics at the University of Calgary.
"We were on the wrong side of the Laffer curve -- cutting the rate increased revenues, keeping all other factors constant."
According to Finance, even by that measure, revenues from firms have not risen as taxes have fallen, although the fall off in revenue is not as severe as the dollar figures suggest.
The data shows revenues increased from about 2.3 per cent of GDP in the late 1990s and early 2000s, to a high of 2.7 per cent in 2006-07 during the boom. When the recession hit, corporate tax revenues fell to a low of 1.8 per cent both in 2008-09 and 2010-11, the last year for which there is data.
When asked about the revenue picture to date, Flaherty's director of communications, Chisholm Pothier, said corporate tax revenues will increase going forward.
"We're leaving more money in the hands of entrepreneurs. This has made Canada the best place in the world to do business according to Forbes magazine," he said in an email response.
"Lower taxes make our economy stronger and create good, long-term jobs. What's more, corporate tax revenues will -- as noted (in) Budget 2012 -- increase by over 30 per cent between 2010-11 and 2016-17, even though we have reduced business taxes to 15 per cent."
Comments are now closed for this storyJim, WinnipegsaidIf you go to Forbes site, Canada was rated high on the basis of a number of indicators, only one of which was taxes. Moreover, the piece actually leads with the fact that our banks were in good shape because their "conservative" lending practices allowed them to miss much of the crash due to excessive bad lending in other countries. Which government was it that brought banking regulation into effect ... hint, not the conservatives, whom I suspect were against such regulation at the time and in fact are now seeking to deregulate various areas of the economy (e.g., environmental reviews). It appears that the Harper government does not mind bending the truth in various areas, including the effects of tax cuts for corporations.
Modi
saidRE: Rick OmenIf you go with the notion that the ability to have more cash in business you will hire more people than why has job growth not spead up as percentage of cash reserve? Pretty simple. It is cheaper to outsource most jobs or use automation to be more efficient. By doing this you not only keep more money in the bank for being cost effective but you get more investment to expand in other markets...while leaving the Canadian population to faulter because the government has less revenue to invest in education, healthcare, and new business developement to create better jobs. Clinton made the US the largest buyer of superchips which helped to create a tech boom that produced strong companies...intel, Cisco, Apple.
Rick Omen
saidWhat seems to be beyond the author and the union guy quoted, is that total income tax revenues are up. Yes, the CIT part of the sheet may be down, but there is also increased income tax from new jobs, that are created because of the CIT cut.
Big Bob in Ottawa
saidWell Pye Chart is right for the most part but it doesn't change my notion that those that are poor get poorer under Conservative governments. Some would argue that's a fair situation but I would argue that fair or not a civilized society requires a standard of living that respects human rights and dignity. This present government doesn't appear to share my view. In fact they wolud probably argue that working hard is the anaswer to all the ills of the world. That's just far too Orwellian. If I'm gonna get sent to the glue factory after 35yrs of working I want my OAS at 65.
Greg Orbman
saidPromising that Tax Cuts Create Jobs is a good way to get elected. All politicians would love to make this promise; however, politicians who make these promises have difficulty explaining their economic failure when they do pursue this overly simple approach to economics. At present Federal Government revenues are lower as %GDP than when the Conservatives took office during 2006, and reduced revenues account for almost ALL the deficit. Contrary to stimulating GDP growth, Canadas average GDP growth was higher from 1997 to 2005 when the Federal Government operated a Surplus. (Before the Conservative Tax Cuts, which have not resulted in substantial savings to most Canadians.)
renal colic
saidThe problme with our current encarnation of the Conservative party/ideology is that while they espose and even attempt to practice low taxation as a way of stimulating the economy (and rightly so) they don;t do this across the board and concurrently provide bailouts to corporations and waste mountains of money on excess government salaries and fringe benefits. IMO if you are serious about tackling our economy then you have to be disciplined and make the cuts in the right places. You also have to have faith in the free market and stop pandering to the corporations who essentially run this country now as they do in the USA. If one is truly a Conservative then I would expect such a government to drastically reduce the size and scope of government and cuts taxes for everyone not just corporations. The CONS have not done this and so they will not succeed. Eliminating the welfare state also means eliminating corporate welfare and this current government does not have the B....LLs to do this because they are for themselves and their corporate buddies not the people.
Will
saidWell said, Prof. Agree completely, and we don't agree very often.
Prof. Pye Chartt
said
