Sunday, May 29, 2011

Do corporate tax cuts produce jobs?

A succession of Liberal and Conservative governments claimed that cuts to corporate taxes are the surest way to increase capital spending and job creation.

So, what happened?

While corporate cash flow rose, capital investment as a percentage of Gross Domestic Product (GDP) showed a long term decline, according to a study released by the Ottawa-based Canadian Centre of Policy Alternatives.

Governments slashed the combined corporate federal-provincial tax rate from 50 per cent in the 1980s to 29.5 per cent in 2010. Before tax reforms in 1987, fixed capital spending stood at 12.7 per cent of GDP. Since then, investment actually fell to 11.7 per cent of GDP.

Thus, not only is there no proof that lower corporate taxes stimulate more investments, leading to more good jobs, it appears that the opposite is the case.

So, where did the 'excess' money go? Apparently, it went into the pockets of rich shareholders and CEOs.

What's next? During the federal election campaign the Conservative Party promised to further reduce the federal tax rate to 15 per cent in 2012. The Liberal Party, which dropped the business levy from 28 to 21 per cent between 2000 and 2004, now propose to restore the rate back to 18 per cent.

The New Democratic Party said it would keep the combined federal-provincial corporate tax rate below the U.S. federal rate, which is 35 per cent for companies with profits above $18.4 million. The question is: to what extent is the NDP brass prepared to alienate its social base just to keep its implacable enemies on Bay Street at bay?

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