Why corporate tax cuts don’t guarantee jobs

Why corporate tax cuts don’t guarantee jobs

The Harper Conservatives are facing a serious communications challenge on what is shaping up to be an election issue. Nearly every year since 2000, the federal government, whether Liberal or Conservative, has reduced taxes paid by corporations. The logic of doing so was to ensure the Canadian economy was competitive.

If taxes are a lot lower in the US than in Canada, it can lead to a loss to our economy. Of course, it’s comparing apples to oranges—as our business leaders well know. Canadian social programmes are a boon to business. Universal health care, for example, is a real savings to Canadian employers versus US employers. One of my favourite friends in the forest industry, Frank Dottori (former CEO at Tembec) once argued that Canadian forest companies were happy to ignore that useful subsidy to their operations—access to reliable unemployment insurance which allowed them to lay off workers seasonally— without having to risk their unavailability later on.

Back in 2000, the general rate of taxation on corporate profits was 29.1%. By 2006, when the Harper government came into office, the corporate tax rate had fallen to 22.1%. At that time, we all remember our budgets consistently posted surpluses. In those days, it was part of the cut and thrust of Parliamentary debate to accuse the finance minister of hiding away the size of a surplus so as to have a surprise windfall.

No longer. Canada moved into a deficit just before the global economic meltdown in September 2008. Due to cutting the GST, cuts to corporate income taxes and increased spending, the Harper government had eradicated the surplus just in time for a recession. With an empty cupboard, Canada has moved further into debt to fund the stimulus package. The latest estimate is that we are now running a $45 billion deficit.

Meanwhile, all through the recession, the corporate tax rate has continued to fall. Last year the rate fell to 18%. As of January 1, 2011, it is 16.5%, with a further cut to 15% planned for next year.

As is becoming clear, the Opposition Parties will oppose further cuts to corporate taxes. The Green Party is proposing that we return to the taxation level of 2008—19.5%.

Reframing Corporate Tax Cuts As Jobs

So, in a nutshell, here is Mr Harper’s communications challenge. How do you convince the electorate that it makes sense to keep cutting the taxes of large profitable corporations: while increasing EI deductions on every paycheque, when there has been no income tax cut for four years, and while facing a daunting $45 billion deficit?

In Don’t Think of an Elephant, US political strategist George Lakoff described how the Republican Party had persuaded US voters to vote against their own interests. It was all about ‘framing’ the issue—so, don’t say ‘cuts to social programmes,’ say ‘tax relief’. It’s all in the (re)framing.
Finance Minister Jim Flaherty has come up with the way to ‘re-frame’ tax cuts for corporations. Corporate tax cuts are now framed as support for the ‘job creators.’ This is not to say that job creation is a new concept—job creation is a priority. And government policies have major impacts on the private sector’s ability to create jobs. There is no question that corporations employ people. But there is absolutely no evidence that cutting the corporate tax rate will cause corporations to create more jobs; despite Prime Minister Harper’s claim that a further 1–1/2% reduction in corporate taxes will create 100,000 jobs.

As some economists have pointed out, the reduction of tax rates in Canada is irrelevant for corporations headquartered in the US. Any increase in corporate profits in Canada must be taxed when repatriated to US head office at the rate of 35%. For those companies, cutting Canadian taxes is essentially handing Canadian tax dollars over to the US Treasury. For Canadian- based companies, the reduction in taxes may or may not be used to expand the workforce.

Just as in the HST debate provincially (when we were told manufacturers receiving reduced taxation would pass those savings on to consumers), Canadians have a right to be deeply sceptical of claims that reduced taxation will be a job stimulant.

A prudent CEO may have many other plans—re-invest in equipment, increase dividends to shareholders, increase compensation for the top staff, make a play for another company, put cash down for mergers and acquisitions….

The idea that increasing corporate profits will result in more jobs reminds me of John Kenneth Galbraith’s explanation of the trickle-down effect: ‘If you feed grain to the horse, the sparrows will find something to eat in the manure.’

Doing The Math

As there is no empirical evidence that lowering corporate taxes increases employment, let’s look for a moment at Finance Canada’s own math. The stimulus effects that the government calculated in 2009 are based on multipliers So in 2009, for instance, $1 spent by the government on corporate tax cuts resulted in 10¢ in real GDP growth, that same $1 spent in infrastructure leads to $1 in real GDP. The government goes on calculate that a 1% increase in real GDP leads to a 2% increase in employment.

Let’s assume we plan to spend $3 billion to create employment and our choice is to either spend it on tax cuts to corporations or for new infrastructure. Using the government’s own multipliers for the stimulus plan, that $3 billion in year one would create 6,500 jobs in infrastructure or 650 jobs if spent on tax cuts to corporations.

My friend the economist (who helped me do the math) agrees that we really do not entirely trust Flaherty’s model but it seems fair to use the government’s model to judge the effectiveness of cutting corporate taxes to create jobs. And, by that measure, the term ‘job creators’ should be expunged from Flaherty’s vocabulary as failing the tests for ‘truth in advertising.’

Elizabeth E. May, O.C. is the nominated candidate for the Green Party in Saanich Gulf Islands and was named by Newsweek magazine in November 2010 as ‘one of the world’s most influential women.’

  • http://pulse.yahoo.com/_IUNKEPNGHRXXQQVYB6GDOC3MWA satinka

    Finally…something that makes sense! I know a bit about PR and so I knew that governments “reframe” negatives to sound like something beneficial. But, to me reframing sounds very much like lying. People have heard enough lies from politicians. People recognize lies when they hear them. People also recognize the ring of truth when people hear it! Thanks for this, Elizabeth May! You have my vote!