Dominion Lending Centres Clearlease Reports Canadian Firms not returning windfall from tax cuts with more jobs, investment

Dominion Lending Centres Clearlease Reports Canadian Firms not returning windfall from tax cuts with more jobs, investment

OTTAWA – (April 7, 2011) Reports the Conservative’s case for corporate tax cuts is increasingly coming under duress on Wednesday after new analysis suggest companies have neither created jobs or invested with their windfall.

The Tories are arguing lower corporate tax rates will create jobs and business investment, blasting both the Liberals and NDP for seeking to tax firms more.

“The worst possible thing that could be done to our economy right now is to raise those tax rates,” Stephen Harper said in response to one report Wednesday.

But an analysis by the Canadian Centre for Policy Alternatives suggests that companies who have gained the most from tax cuts the past decade have so far not created more jobs than the economy as a whole.

In a separate analysis, economist Jim Stanford of the Canadian Auto Workers says the pattern of business investment has fundamentally changed. For four decades since 1960, companies reinvested virtually all after-tax cash flow in net terms; but since 2001, when tax rates began to plummet, relative investment has dropped and now accounts for only 66 per cent of cash flow.

The finding is similar to a published report Wednesday that showed business investment declined in Canada at the same time the combined provincial and federal tax bite was being reduced from about 42 per cent at the turn of the century to the current 28. It is expected to come down to 25 per cent next year.

The two so-called left-wing economists admit the issue of corporate tax cuts have become a political football and that many economists disagree with their findings.

The debate, however, is not so much over the data on investment and job creation as how it is to be interpreted and whether the past decade is an appropriate yard-stick.

Even Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have expressed frustration with the level of business investment in the past decade.

Jack Mintz of the University of Calgary, who has written extensively on the question, says investment during the period analyzed is not indicative because of two economic downturns at the start and end.

During the decade, stock markets did poorly and firms hoarded cash in order to avoid bankruptcy, he says.

“Corporate taxes are only one part of things that affect investment decisions,” he explained. “But there’s huge literature on this (that) when you cut the cost on capital by say 10 per cent, you will cause capital stock to rise over time by seven per cent.”

That’s the theory, agrees David Macdonald, who authored the CCPA study. It just hasn’t been borne out in reality.

Stanford adds that effective taxes on corporations have been falling in Canada since 1997. “That’s a long time to run the experiment.”

The new reports are a boon to both the Liberal and NDP campaigns which suggest they can finance their election promises without hurting the economy.

Campaigning in Nova Scotia, Liberal finance critic Scott Brison said it is important that taxes in Canada be competitive with those in other countries, but the payoff after that has been achieved is small. Canada is no longer a high-tax jurisdiction, he said, so there is little reason to keep cutting them.

The other issue is what is the best way to create jobs, he adds.

“There are better ways of creating jobs. If you want bang for the buck, investment in training, education and in helping households and companies green their operations will lead to more jobs.”

Economists also list infrastructure spending, as the Conservatives did during the recession, as another effective way to create jobs, adding it can be a good investment if done properly.

The evidence from the past decade does not make a compelling case for corporate tax cuts, however.

The analysis from the CCPA, an Ottawa-based think-tank, shows that among 198 of the country’s biggest 245 public traded companies for which there is data, corporate profits rose by 52 per cent from 2000 to 2009.

Meanwhile, those same companies were paying about 20 per cent less in taxes in 2009 than they were in 2000 — a total of $12 billion a year less.

Yet, from 2005 to 2010, those same companies increased their inhouse employment by five per cent while the average gain nationally was six per cent. Since most of the firms are multi-national, it is likely some of the jobs created were outside the country.

Macdonald, the CCPA’s research associate, says Ottawa has made a “Faustian” bargain with the corporate sector — lower taxes in the expectation the money will come back in added investment and more jobs.

“What’s happened is this money was either paid out in profits or they are just sitting on it, which is not what you want in a recession,” he said.

Stanford says the disconnect between higher profits, lower taxes and stagnant investment is central to the low productivity performance of Canadian firms.

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