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"The optimal tax mix is heavy on consumption taxes, light on corporate taxes, and somewhere in between on personal income taxes."

Rather than vote for a party that believes in corporate taxes, I think I'll still vote against the party that cut the GST by 2 ppts. But I do wish the Liberals would get their heads out of their asses on this one.

Yep. No party has the recipe right.

Thanks Stephen. Now, all that remains is forwarding this post to the PPG reporters.

"Yep. No party has the recipe right."

The Greens were really close for awhile, but seemed to have changed direction over the last couple years on corporate income taxes.

True. The Greens under Harris had me pretty excited. May has lead them toward some more unintelligently populist policies, but they may still have the best tax reform platform.

I opposed the Green Shift partly because twenty years ago when I was a student of Professor Woolley she taught us that a "good" tax was one that was, among other things, visible, non-distortionary, and not regressive. The Green Shift was invisible, distortionary by design, and regressive.

But that's only part of it: even if it were the most awesomely designed tax ever, the underlying science was bunk and it is beyond the competence of economists to pull rank and lend their scholarly credibility to the alarmists.

The cause-effect relationship between carbon and global warming (which even the IPCC concedes hasn't been occurring over the last 15 years) hasn't been satisfactorily proven, and there are serious and legitimate concerns with the quality of scholarly research on the matter. What is undisputed is that there is alarmism; when papers start running stories that AGW is forcing women in developing countries into prostitution, one gets the feeling they're trying way too hard to sell it.

I know, the subject here is corporate tax cuts, which, as it happens, I oppose at this time, but the bit about Green Shift required a response.

As for fiscal policy today, slash transfer payments, smash the unions, axe "social" spending, institute an "intergenerational equity" surcharge on baby boomers for stealing from the next generation, and invoke the Emergencies (formerly War Measures) Act and the Notwithstanding Clause if necessary to make it happen and maybe then we can look at lowering corporate tax rates, but not before income tax rates come down first. Cutting taxes when running a $50 billion deficit just isn't on.

So, turn Canada into a military police state and shut down the government. Brilliant policy advice! I'm sure the voters will be queuing up to support it.

In what we commonly and perhaps mistakenly refer to as police states, the police answer to the dictator. In Canada, the police don't answer to anyone.

I'm not sure that's such a good thing, your mileage may vary, but you put your finger on it nicely, democracy as currently practiced inevitably leads to Ponzi-scheme public finance policies that would make Bernie Madoff blush.

Actually, it's more of a pyramid scheme, and given that intergenerational equity is a human right recognized by the UN, democracy may inevitably lead to human rights violations.
We have a responsibility to protect (R2P) the next generation of taxpayers from the human rights violation that is deficit financing and this necessitates a robust response using all tools at our disposal.

If the intent of this blog list is to educate the PPG and win them over to your argument, why not simnplify it for all of us (I tried reading a few papers - typical 'theoretical" stuff).

So, let's cut to the chase. You write: "The optimal tax mix is heavy on consumption taxes, light on corporate taxes, and somewhere in between on personal income taxes."

So, in 2010, in Canada, in this resource based economy, where the world economy is at today, what is your optimal tax mix, and how did you arrive at the specific numbers?

What does PPG mean?

Parliamentary Press Gallery.

Right. I subsequently saw Aaron Wherry (member of PPG) directed some traffic your way on his Macleans blog:

Stephen Gordon has put together a valuable primer ahead of what probably should be a national discussion on taxes and the federal treasury.


Doubtful he read many papers either. He posted roughly 7 hrs ago.

Ah - thanks.

JVFM, the rest is going to have to await another blog post.

OK. I'll continue waiting - a q I've been asking for quite sometime. Tough to argue one political platform is better/worse than the other until one knows the optimal point (and assumptions), and the tradeoffs in adhering to that policy as opposed to others.

Indeed. But I'm pretty sure you were one of the people asking where the evidence was for the tax-shift story. One thing at a time.

True. But when presented with the generic argument that reducing corporate taxes results in more economic activity (through tax shifting), I believe I asked for the evidence that Canada's corporate tax rates weren't already low enough (which the taxguy from KPMG seemed to argue were low enough or getting close in a subsequent video link I provided - Lang and O'Leary Exchange).

The fellow from KPMG seemed not to be arguing so much that lower corporate taxes would be a bad thing, but that we could get more productivity bang for the public expenditure buck by focusing on other areas. Apparently a major cause of lower Canadian productivity is our underdeveloped stock of well-trained managers. On the other hand, maybe it just takes some time for these things to work through long-term corporate strategy. The firm I work for has been undergoing a substantial investment and restructuring program that will only show strong productivity dividends in 2013 or later. That said, I'm not sure one could attribute the investment with the change in tax rates, though the elimination of capital tax and introduction of the HST in Ontario does help with the payback.

You're lucky you haven't been living in B.C. for the 'tax revolt' against the HST, Stephen - or maybe unlucky, since it might have convinced you of the futility of your efforts and saved you some time :)

Although, on a serious note, I do appreciate your effort to pull together some stuff for me to read on the topic, so thanks.

Like Stephen I like the Nordic model and take away from it that tax mix matters, so funding a large public sector may require more than taxes on "people we do not know" (ie corporations and the rich), so consumption taxes need to part of the mix, offset by transfers to the poor; and that corporate taxes should not be too high to avoid capital flight. This is an important lesson if Canada wants to go from taxes of about one-third of GDP to Nordic levels of more than 40%.

That said, Stephen has turned this into an ideology where corporate tax cuts are always and everywhere a good thing, and it is cause for celebration if Canada cuts corporate taxes because this will presumably lead to higher long term rates of economic growth. Because the empirical literature says so.

This is a dangerous delusion. The problems with it are several:

It fails to explain Canada's economy, where corporate taxes have been cut but investment as a share of GDP and as a share of profits have both fallen, even as corporate profits have grown as a share of GDP. Stephen prefers to use a sleight-of-hand which uses a different deflator for investment than GDP so that in adjusted terms this situation looks better but in the real world of dollars as we know them, it just ain't so.

It fails to capture Canada's unique circumstances, in particular its relationship with the US, where corporate rates are now higher than Canada. This does not reduce the total taxes paid of US corporations but leads to a treasury transfer effect from the Canadian to US treasuries because US corporations are taxed on their worldwide income.

It fails to capture the nuances of why corporations invest. Investment decisions in the real world are lumpy and uncertain in terms of rates of return. Small changes in the after tax rate of return pale beside the other major considerations for investment such as access to resources, access to skilled labour, electricity and other utility costs, and markets for products. A recent KPMG study found that only 14% of location specific costs are due to taxes. My quick look at the OECD sources cited finds that these factors are never adjusted for in regression analyses.

I could go on and on about methodological problems with the empirical studies (which independent variables, which industries, which countries, what functional forms are used), but that just gets into he said she said discussions that are over the top of the heads of most readers. I think most empirical researchers on the topic find evidence that justifies their previous beliefs. One study I found persuasive was a survey for the IMF by Gerson, who found that the only consistent outcome was that corporate investment was strongly related to strong demand conditions not the supply side factors that most economics are overly obsessed with.

In any event, Canadian taxes were among the lowest in the world according to the KPMG study (see http://www.progressive-economics.ca/2010/04/01/kpmg-corporate-taxes/), second after Mexico among the countries studied. In fact, Vancouver was the lowest tax city studied, and Montreal and Toronto were number 4 and 5 respectively. The knee jerk demand for more corporate tax cuts is nonsensical and counter to the evidence of KPMG's corporate bean counters anyway.

But even if there are no diminishing returns to corporate tax cuts, ie strong growth benefits to even lower taxes, we should not unequivically cheer. A huge amount of investment in Canada in recent years has been in the tar sands. This is bad economic growth that is contributing to a planet that will be largely unhabitable by humans within 100-200 years. We need to think carefully about in what sectors economic growth is happening.

The ideological approach to corporate tax cuts means that they should simply be zero. But it is not desirable to cut corporate taxes below a certain amount, or the wealthy will use corporations to accumulate wealth and dodge their personal taxes. Minimally, when corporate taxes are reduced we must acknowledge that this is a windfall to the owners, who tend to be in the top 5% of income earners, so there should be some compensating increase in top MTRs for personal income tax.

Going back to our agreement about the Nordics, my interpretation of this literature is less fundamentalist. I do not oppose a freeze on further tax cuts as I am doubtful of the benefits of doing so. Indeed, Canada could harmonize rates upward to US rates, and generally aspire to be in the middle of the pack without fear of economic harm. Based on the related post (http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/05/trends-in-oecd-corporate-income-tax-rates.html) there is no obvious reason why Canada needs to go further than that.

Good summary argument of a counter view Marc.

An interview with one of the authors of the KPMG study (the same report that Marc is making reference to and that Andrew F and I were previously characterising) can be found in my previous comment here.

Rather than vote for a party that believes in corporate taxes, I think I'll still vote against the party that cut the GST by 2 ppts. But I do wish the Liberals would get their heads out of their asses on this one. Posted by: Mark | May 27, 2010 at 08:58 AM

Great posts. My sentiments exactly. In addition to cutting the GST by 2%, I will also be voting against the Harper Conservatives for two other reasons:

1) Harper stooped to sectarian scaremongering in late 2008 while trying to keep his minority government alive. The scaremongering was targeted at the Bloc québécois and the nationalist movement in general.

2) Harper has now backed Israeli terrorist attacks on civilians over several occasions. Translation: Harper actively supports the biggest current threat to collective western security.

Professor Gordon,

Have you thought of approaching some of the alternative newspapers (NOW magazine in Toronto is my first thought) about writing a single, or series, of articles (similar to the NDP posts you've done). I think you'd be speaking directly to a constituency that needs this sort of info. Call it the "Lefty Economist" or something so people don't think you're a banker.

Happy Conservative - great to see a former student on the blog! Frances

Ms. Woolley,
Do you endorse your Happy Consevative's characterization of your stance on taxes? Do you agree that the green tax shift is bad?

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