Corporate Tax Rates, the Conservatives and the Liberals

It's been interesting watching the back and forth between the Conservatives and the Liberals regarding corporate tax rates.    However, I've become frustrated with a question that isn't being asked of the Liberals.

There are three things that can be done with the corporate tax rate:

• Lower it
• Keep it the same (currently 18%)
• Raise it

The current state of the corporate income tax research indicates that a corporate tax cut, dollar-for-dollar would do more to improve the state of the Canadian economy than any other tax.  Any revenue shortfall could be made up with a rise in the GST and any equity concerns can be made up with an increase in GST rebates.  I wouldn't claim to know what the 'optimal' corporate tax rate is, but I would argue we do not need to know.  We can cut the rate somewhat, study the effects, then decide how to proceed from there.

Although the Conservatives have moved in (my view) the correct direction with respect to the corporate tax rate, I cannot agree with their justification that it will greatly help improve employment.  As Prof. Gordon has pointed out, corporate tax rate policy, like most economic policies, isn't about jobs.  It would be hard to argue that dollar-for-dollar, a corporate tax rate cut is the most efficient way to increase employment.

But the Liberals, in my view, are making far less sense.  From the Vancouver Sun:

"(Stephen) Harper is on a tour to promote corporate tax giveaways. I've just come from meeting all the chief executives of the country and told them that's a bad choice when we are in a $56-billion deficit," Ignatieff told a small group of reporters. "We said our priorities are education, learning, care, getting the deficit under control and we had a great reaction from everybody in the room."

Which begs the question: If higher corporate taxes are better under a deficit, why not raise them?

I can see two possible reasons why to maintain the corporate tax rate at 18%:

• Because we (the Liberals) believe 18% is the optimal corporate tax rate
• Because we believe that the previous tax cuts need to be studied in further detail to find out what the effects were (as discussed above).

The Liberals are making neither of these arguments.  They have put forward no reasons why 18% is optimal.  They have not suggested that the previous cuts be examined in more detail (by, say, increasing the funding to the PBO).  Rather it appears to be some kind of status quo bias where the current state of taxation is optimal (by virtue of the fact it is the current state) and any deviations from that are sub-optimal.  Which is particularly strange once you consider that the Conservative Party created that status quo.

I know many media-types read Worthwhile Canadian Initiative.  I beg of you - please ask Mr. Ignatieff the following question:

If Canada needs more revenue to fight the deficit, why are the Liberals not advocating raising the corporate tax rate above 18%?

Comments

[Determinant]

Raising the GST is a political death wish. It makes sense from a policy point of view but it's horrible retail politics. The party that suggests its can guarantee that they will be sitting in the Opposition benches for the next five years.

[Mike Moffatt]

"The party that suggests its can guarantee that they will be sitting in the Opposition benches for the next five years."

I personally don't buy it, but I'll take your word for it. That'd still be a step up for 3 of Canada's big 5 parties.

But that still doesn't explain why Ignatieff doesn't recommend raising corporate income taxes.

[Brett]

With my limited understanding of economics, this makes sense to me. But I'm wondering about this: The Toronto Star cites Kevin Page's office as making something like the opposite claim. Are you (and the research you cite, which I admit to not having read) disagreeing with Page or are you simply talking about different things?

http://www.thestar.com/news/canada/article/929037--tory-tax-cuts-could-trigger-election

[Mike Moffatt]

It looks like Page is discussing short-term stimulus there, not long-run economic growth. If that's the case, then I agree with Page.

[Stephen Gordon]

Actually, canceling the cuts probably amounts to an increase. They were adopted by the House of Commons more than 3 years ago (December 2007), so firms have been using the announced rates for planning purposes since then.

[Mike Moffatt]

"Actually, canceling the cuts probably amounts to an increase. "

True, which is where the status-quo gets a little weird. But I'd still ask 'Why not 19%'?

[Stephen Gordon]

It looks like Page is discussing short-term stimulus there, not long-run economic growth. If that's the case, then I agree with Page.

That's what it looks like to me as well, and I agree. This is yet another classic example of what Nick called applied orthogonality. Arguing about the merits of the CIT as a short-term stimulus instrument is entirely beside the point. The CIT isn't about jobs.

[Brett]

That's sort of what I expected, but I couldn't put my finger on how it was orthogonal. Thanks!

[Brett]

I figures that there might be some kind of talking at cross purposes, but I couldn't see how.

[Patrick]

I think it was Stephen who posted about the evidence pointing to CIT increases coming out of worker's wages. Shouldn't that bother the left of centre parties?

Anyway, the 'tax wealthy corporations' meme is really all about politics not sound policy. The thing I don't understand is why they stick with it when it clearly isn't increasing their popularity. Maybe they could try proposing policies that might actually work, like a Pigouvian tax on carbon ... Oh, yeah. Never mind. I guess we get the politicians we deserve, not the ones we need.

[Michael Smart]

"please ask Mr. Ignatieff the following question: If Canada needs more revenue to fight the deficit, why are the Liberals not advocating raising the corporate tax rate above 18%?"

I don't see any inconsistency in Ignatieff's position. The current rate is 16.5%, not 18%, and it will fall again on Jan. 1 if nothing is done. So Ignatieff wants to raise the rate, a little. (Or he wants voters to think he does, but that's another matter.)

By the way, the last Liberal government had announced a plan to cut the general rate to 19%. He hardly a hypocrite or dithering to say he wants 18% now, is he?

Mind you, I'm not saying the optimal rate *is* 18%. (Who knows?)

[Gregory Sokoloff]

Mike, good post. However, why stop at the CIT policy? On the Liberal website, the Liberal priorities for Canada are listed as:

• Deficit reduction by committing to a deficit to GDP target of 1% within the first two years of a Liberal government and further decline every year thereafter until the budget is balanced;
• Fiscal prudence by restoring a reserve as a buffer to achieve targets;
• Spending restraint by finding targeted, sustainable savings in partnership with the public service and proposing new programs in the Liberal platform only if they can be financed without adding to the deficit; and
• Freezing corporate income tax rates to their current level until Canada can afford to lower them further.

I'm baffled by all of this deficit talk. Are the Liberals positioning themselves as the Austerians to the Conservatives as the Keynesians? Is anybody asking Ignatieff to explain the macroeconomics behind these ideas? I suppose the strategy might be to identify Harper with Mulroney in order to be Chretien the deficit-slayer, but this would suppose that votes would follow the analogy and ignore the different historical circumstances.

[jeff]

Why can't corporate tax cuts be tied to companies hiring or domestic capital investment to improve employment? For example, a 1% tax cut if you increase your workforce by 5% so both parties (I'm not sure if the math is correct on this one but the idea is that both parties are clearly better off (lower taxes for company and lower unemployment for the country). This could expire but I think it would be effective to spur growth instead of a blanket tax cut that has a danger of showing up as a executive bonus or corporate dividend.

[Mark]

I think CIT is an imperfect substitute for PIT.

Many super-high income earners shift money in and out of corporate income though I'm not familiar with the accounting details that CAs use to move income around.

I do know from looking at detailed revenue data that CIT revenue goes up while top-bracket PIT revenue goes down when there is a CIT cut without a corresponding PIT cut. Think something like Gerry Schwartz and Onex.

So I believe there is a lower-bound on CIT rates. Maybe given prevailing PIT rates, 18% is 'the' CIT rate, though I doubt it. Again I'm not an accountant and might be thinking about this all wrong. I'm sure Mike has more insight.

[Bob Smith]

Michael Smart: "By the way, the last Liberal government had announced a plan to cut the general rate to 19%. He hardly a hypocrite or dithering to say he wants 18% now, is he?"

Well, except that he was the deputy leader of the Liberal party in 2008 when it ran on platform of cutting corporate tax rates to 14% by 2013 on the basis that it would "[drive] the Canadian economy and [create] jobs." Assuming he was not vehemently opposed to his own party's platform, I think it would be safe to characterize his current position as being the exact opposite as his past position.

http://network.nationalpost.com/np/blogs/posted/archive/2008/09/22/dion-unveils-liberal-platform-today.aspx#ixzz1CczNiadY

[Michael Smart]

"Assuming he was not vehemently opposed to his own party's platform"

Uh, I don't think he was ever much of a fan of Green Shift.

http://www.theglobeandmail.com/news/politics/article714714.ece

(How did we ever have arguments back in the pre-google era?)

[Bob Smith]

I don't think Iggy was that opposed to Green Shift, since he was the one who originally campaigned (unsuccessfully) on a carbon tax (albeit a far more limited one) as part of his 2006 Liberal Leadership bid (you may remember the clip of Stephane Dion mocking the idea in 2006 was replayed endlessly by the Tories as part of their 2008 election campaign. No doubt they will do something similar to Michael Ignatieff if he chooses to campaign on corporate tax increases).

http://www2.canada.com/vancouversun/news/story.html?id=ed009175-7814-44f0-aa99-327a4209a259

[Erin Weir]

Mike, are you going to acknowledge the other Michael’s correct point that the current (2011) federal general corporate tax rate is 16.5%?

[Jacques René Giguère]

I'll join Patrick on a first point and comment on Grgory Sokolff on a second one.

First point
Given Modigliani-Miller, weknow the financial structure of the firm will adjust but the size will not change.
Given an open international market for capital. we know that the tax won't be shifted to shareholders but to canadian workers, customers and suppliers.
Given the integrated system of dividend taxation with dividend tax credit merely transforms the CIT into a withdrawal at the source for shareholders PIT.
Given that any Canadian CIT lower than the U.S. CIT merely means that a U.S corporation owning a cdn subsidiary will pay more dollar-for dollar to the U.S. Treasury what it it doens't pay to Canada.
One just wonders what the debate is all about.Except for the Common Accepted Wisdom.
The right squeals because they think they pay. The left either squeals if they think corporation don't pay enough or purr when they think they pay enough. Both prove how little they understand economics. (The second-to-last person you shoud ask about economics is a business person. The last is a politician, especially a minister of finances)

To Gregory: 99.9% of people and only-God-knows-and-the-devil-suspect-how-many economists have no understanding of macro.The default state of mankind is Austerianism. My income goes down so I must slash expenditures is wired in the brain. There is no macro in a band of hunter-gatherers. Grumpf no kill mammoth, Grumpf no eat mammoth. So you always campaign on deficit reduction, whether you understand the basics or not. (Roosevelt 32). For most voters, deficit is just a code word for "things are bad we must do something to make it disappear." Grumpf no make mammoth appear by eating what's left of the preceding mammoth. That'a about how an election works. As Jack Nicholson famously said: "You can't stand the truth."

[Mike Moffatt]

"Mike, are you going to acknowledge the other Michael’s correct point that the current (2011) federal general corporate tax rate is 16.5%?"

You're missing the broader issue - why not 19%? What's so special about 18%, other than a status-quo bias? (a.k.a. "we should have left things unchanged")

[Mike Moffatt]

Erin: So I take it you support an 18% CIT then?

[Erin Weir]

I want a federal CIT rate of at least 22%, which we had from 2004 through 2007.

Your argument is asymmetric. The Liberals say they want to raise the CIT rate from 16.5% to 18%. You ask, “What's so special about 18%?”

The Conservatives want to cut from 16.5% to 15%. What’s so special about 15%? Has anyone explained why it’s optimal?

You’re answer seems to be: “I wouldn't claim to know what the 'optimal' corporate tax rate is, but I would argue we do not need to know. We can cut the rate somewhat, study the effects, then decide how to proceed from there.”

Can’t proponents of higher corporate taxes advocate the same approach in reverse? Let’s raise the rate to 18%, study the effects and then decide how to proceed.

[Mike Moffatt]

"Can’t proponents of higher corporate taxes advocate the same approach in reverse? Let’s raise the rate to 18%, study the effects and then decide how to proceed."

Of course, and that would be perfectly reasonable had the Liberals advocated that (see the main post). But they haven't.

As well, we've also had 18% and 19% and 19.5% and 22% in recent history, so it's not as if we're going into unchartered territory here. The argument is asymmetric because the direction of CIT movements is asymmetric!

[Jonathan]

The current state of the corporate income tax research indicates that a corporate tax cut, dollar-for-dollar would do more to improve the state of the Canadian economy than any other tax. Any revenue shortfall could be made up with a rise in the GST...

C'mon. This is politics; we can't have a complex debate about taxation that covers an overall plan and multiple taxes. We can only - blindly - debate on narrow tax rate at a time.

[Jonathan]

*one narrow tax rate...

Sigh.

[Erin Weir]

If the only valid rationales for setting corporate tax rates are to institute the optimal rate or to experiment with different rates (in search of optimality), then I guess the Conservatives deserve equal criticism for not making those arguments either?

[Mike Moffatt]

"then I guess the Conservatives deserve equal criticism for not making those arguments either?"

Yes. Read this:

"Although the Conservatives have moved in (my view) the correct direction with respect to the corporate tax rate, I cannot agree with their justification that it will greatly help improve employment."

So yes, I think they're doing the right thing but justifying it with the wrong reasons.

[Erin Weir]

But you also wrote that the Liberals “are making far less sense.” It seems to me that the Conservatives are making equally little sense, according to the criteria you applied to the Liberals.

[Mike Moffatt]

Okay, that's fair. I give the Conservatives a 2/10 on the issue and the Liberals a 0/10. But if you want to suggest they both get 0, I won't argue.

[Dan]

Jack Mintz put out a report a few years ago that said the perfect combined federal/provincial tax rate to maximize tax revenue is 28%. With provincial rates hitting a national average of 10% next year, an 18% federal corporate income tax rate would be the magic Mintz number. Although Mintz is infamous for changing his mind every three months on things like this so he probably has a more recent report out with an entirely different estimate.

[Erin Weir]

Indeed. I made that point in “Mintz Misleads on Corporate Taxes” (although the average provincial rate will not quite hit 10% next year.)

[y finance and petro]

Unlike other countries, in 2008 80% of our corporate profits were finance and petro (counting pipelines but oil profits only up since). So this is a pointless debate about the remaining 20% vs public spending or surpluses.
The debate should be: why finance? It trickles down into pension funds and some takeovers, the CPC tax cuts. Shouldn't we be advising our banks not to takeover until cdn-style finance regulations are passed at least?! CPC big brothers are blocking regs down south.
Oil is not in need of a tax cut, they need diversification. Our economy needs that remaining 20% of corps to grow. NDP oil corporate tax rates shifted to any non petro or finance actor would maybe result in a runaway AGW world that doesn't hate us...

[Sergei]

The purpose of any economy is consumption (whether good or bad) and not corporate profits.