The issue of corporate taxes is becoming an issue, and it may even be an issue that provokes an election. Perhaps unsurprisingly, the debate has deteriorated even faster than I had feared. Here are five Bad Talking Points that I wish people would stop talking about.
2. Reducing the CIT will NOT generate jobs. Corporate tax policy is not about job creation; it's about increasing output, productivity and wages; see Bad Talking Point 1.
3. Corporate taxes are already 'competitive'. This is the same thing as saying that Canada is already rich, so why bother trying to increase our incomes? If we can do better, then we should. The efficacy of raising or lowering the CIT depends only marginally on what other countries are doing.
4. Corporate tax cuts are part of a 'race to the bottom'. This point confuses 'low corporate taxes' with 'low overall taxes'. The most successful social democracies have long understood that the recipe that reconciles high economic growth rates with high government spending includes low corporate tax rates.
5. Rescinding the corporate tax cut will help fight the deficit. If it's government revenues we need - and I agree we need them - then the CIT is the worst way to raise them. Even if we set aside the effects on income and wages (and we shouldn't), the effect on the budget balance of a CIT reduction of 1.5 ppt is on the order of $1b-2b - less than one percent of the federal budget, and only a fraction of the structural deficit we have to deal with. The best way to a balanced budget is to rescind instead the cuts to the GST.
it's about increasing output, productivity and wages
If so, then why hasn't 10 years of corporate tax cuts produced any of those effects.
Posted by: Robert McClelland | January 30, 2011 at 12:15 PM
I have a post in preparation explaining why that is a very lame question. Stay tuned.
Posted by: Stephen Gordon | January 30, 2011 at 12:25 PM
"then why hasn't 10 years of corporate tax cuts produced any of those effects."
You can lead a horse to water ...
See under "Corporate Management, Canada, Suckage"
Posted by: Patrick | January 30, 2011 at 12:28 PM
Not sure whether it got mentioned before, but what is the real, effective corporate tax rate in Canada? Because that is what matters most in the end.
I did some digging and it appears that the yearly operating profit of Canadian corporations is around $240 billion (post tax) and the corporate income is around $30 billion. That suggests a 11% effective tax rate - pretty low.
If I did not mess up my numbers, then this means the following per capita numbers: Canadian corporations generate a profit of $7100 and pay $890 in corporate taxes, per capita.
I find such numbers much more useful for policy discussions than "18%" or "16%". Those are maximum tax brackets and certain sectors have various tax allowances and there are probably some tax loopholes as well.
Another question would be, how much of operating profit is being distributed to owners of corporations as dividends or share buy-back programs? Those "costs" are in essence profit too, just not taxed.
Also, how much of the true corporate profits get "spent" in form of "costs" to foreign subsidiaries in countries with lower corporate tax rates, under various "intellectual property" and similar tax-loophole disguises?
I.e. the question is what are the real profitability and the real taxation numbers - only then can a well-informed policy discussion begin.
Posted by: White Rabbit | January 30, 2011 at 12:32 PM
Here's a study from 2005 of marginal effective tax rates. (pdf)
Posted by: Stephen Gordon | January 30, 2011 at 12:43 PM
You can lead a horse to water ...
See under "Corporate Management, Canada, Suckage"
So once again it's just more textbook theory that doesn't actually work in reality.
Posted by: Robert McClelland | January 30, 2011 at 12:50 PM
Hm, this report says nearly 40% effective tax rate. That does not sound believable, with $240 billion corporate profits per year that would be in excess of $100 billion - while the reported tax revenue I found was only $30 billion.
Was this report done for lobbying purposes? I don't see it including effects of the various tricks that corporations can use to reduce their tax obligations: dividends, share buy-back, foreign and off-shore subsidiaries and other loopholes.
I think the number we can rely on is the operating revenue - there's no interest of corporations to hide the value of it. The rest such as operating profits are highly ... tailored, both to smooth out financial market expectations, and (primarily) to avoid corporate taxes in the origin country of the revenue.
I've not found a report that tries to systematically identify those tricks and estimates the true effective profitability (and hence the true effective corporate tax rate) of corporations.
Posted by: White Rabbit | January 30, 2011 at 12:54 PM
Stephen, I appreciate your crusade against monochromatic ignorance, but aren't some of your points a little far on the definitive side? For the record, I'm not excited about another corporate tax cut right now - see #3 and #5. However:
1. You argue that corporate income tax cuts won't create jobs because only other factors and policies will. Isn't that a shade too definitive? Isn't it plausible that
(a) innovation and
(b) new investment
Can create new jobs and therefore
(c) CIT cuts could contribute - at a minimum - to a pro-investment climate and positive international reputation for investment so it's fair to argue that
(d) CIT cuts could retain or attract investment in a manner that will lead to (a) and (b) happening here more often?
2. Here, too, you sound like you're quibbling for the sake of quibbling. I don't think a corporate tax cut is either the *best* nor is it the *most direct* jobs policy. Yet surely it's fair to argue that it is *a* jobs policy?
You argue that productivity, output and wages are the benefits. Take it down to the one-factory level: if an auto parts factory invests in productivity, it's more likely to retain jobs and keep its place in the supply chain. If the same factory invests in output, then it's more likely to be in a position to expand sales to new customers or keep pace with new orders, increasing job creation potential it wouldn't otherwise have. And the capacity to pay higher wages is also a capacity for new hires. Sounds like a lot of jobs potential to me.
I know the flaws in that argument, but you're not arguing that there are flaws. You're arguing that it's completely illegitimate to argue it at all. Huh?
3. "If we can do better, then we should." Well, sure, but that's policymaking in a vacuum. We can also try to do better in a half dozen other areas where we're much less competitive first. Why is corporate income taxation first in line? It's fair to argue that we should try to lead the world in one area. But surely it's equally fair to argue that Canada should focus on weaker spots instead?
4. I agree with you on this point. :)
5. First, this is a political discussion as well as an economic discussion. Raising revenue from other sources - er, not sure what you have in mind - but in general it's harder to cut services or increase other revenues in a political environment where you just cut taxes for corporations.
And as you correctly note, the issue isn't whether raising corp taxes will reduce deficits. It's whether additional corp tax cuts will *increase* the deficit and make it *even worse* than it would otherwise be. And I, for one, have a big problem with the "it's only $1-$2b" trope when it comes to adding to structural deficits in the tens of billions. The "billion here, billion there" attitude is what creates structural deficits in the first place.
Respectfully,
- BFK
Posted by: Stateofthecity | January 30, 2011 at 01:03 PM
BFK,
I think Stephen is arguing in #1 and #2 that changing the corporate tax isn't going to change the NAIRU. In the absence of a crisis such as the recent/current one, the unemployment rate will be approximately whatever the Bank of Canada thinks is the NAIRU. Any beneficial effects will come out in higher productivity and hence higher mean income, but not lower unemployment.
Posted by: thomas | January 30, 2011 at 01:42 PM
We could approach corporate tax rates as a way of playing a Bradner-Spencer profit-shifting game in an international economy dominated by mobile multinational firms. Net taxes do appear to influence the location of both highly mobile activities such as producing film and television as well as more sunk capital-intensive activies like auto plants. In both cases, firms are typically chasing generous subsidies.
I would guess that subsidies are the key, and that corporate tax cuts alone would have little influence on choice of location.
Otherwise, it is curious note, again, to what extent the Canadian left--such as the New Democratic Pary (NDP)--has become immune to policy developments in the Nordic social democracies. Reactionary, populist and the Canadian left fit increasingly well in the same sentence.
Posted by: westslope | January 30, 2011 at 02:12 PM
White Rabbit - I believe the 40% is the 'marginal' effective tax rate - explained at the bottom of page 5, top of page 6.
And I'd agree with BFK, you can't ignore the politics and the fact that the majority don't or don't seem to want to understand the basics of public finance. No one is going to accept an increase in the GST if Corporate taxes are falling. Which raises a question. Is this an example of the world of second best, or have we fallen down the rabbit hole?
Posted by: Jim Sentance | January 30, 2011 at 02:37 PM
StateoftheCity:
Assume CIT cuts do increase investment demand. (I do not know whether this is true or not.)
For a given interest rate set by the Bank of Canada, that would increase Aggregate Demand, and increase the demand for labour in the short run. Some would argue that it would therefore "create jobs".
But, exactly the same effect could be achieved by the Bank of Canada cutting the rate of interest. If the Bank of Canada wanted to increase AD, under current circumstances, it would have set a lower interest rate. But it didn't. Therefore we can conclude that *if* the CIT cut increased AD, the BoC would simply raise the interest rate to get AD back to where the BoC wants it to be.
In the long run, assuming CIT cuts increase savings and investment at the expense of consumption and/or net exports, the capital stock will eventually be higher. That may (or may not) increase the demand for labour. Given a long run Natural Rate of Unemployment, that would increase real wages. Which is good. But it comes at the cost of reduced consumption and/or net exports. There's a cost. If we wanted increased savings and investment, we could just subsidise them.
Not that I've spent a lot of time thinking about the CIT, but generally I would be in favour of cutting it. But my support has nothing to do with creating jobs.
Posted by: Nick Rowe | January 30, 2011 at 02:43 PM
Higher CIT 'second best'? Nah.
If the Feds really, really need 1-2B that badly, why don't we just legalize and tax marijuana? Now *that* would be (at least) second best.
Posted by: Mike Moffatt | January 30, 2011 at 02:43 PM
If the GST/HST was buried in the price as it is in most European countries, including the UK, people wouldn't scream so much. But since it can't be buried for obscure constitutional reasons, people scream bloody murder about it.
Furthermore the people of Canada voted twice for parties which explicitly promised to abolish or cut the GST. Chretien reneged on his promise, Harper didn't and couldn't. In a democracy the people rule and Harper had to make that cut to stay alive politically. The GST was massively unpopular and public resentment of it was ignored for fifteen years. Again in a democracy that can't be allowed to continue. Somebody had to stand up to the electorate and say "I'm sorry" for ignoring people's clear ballot intentions. The process needed its pound of flesh.
Really, at rock bottom it comes down to "What price democracy?"
Posted by: Determinant | January 30, 2011 at 02:49 PM
The really weird thing about the 'we can't raise GST' argument is that I'm old enough to remember David Peterson raising the RST back in 1988 and nobody much cared.
Posted by: Mike Moffatt | January 30, 2011 at 02:54 PM
Harper didn't need to make the GST promise to be elected. The Liberals lost that election more than the Tories won it.
White Rabbit, both share repurchases and dividend payments are made with after-tax income.
Posted by: Andrew F | January 30, 2011 at 03:00 PM
@ Nick Rowe:
--NR: "Assume CIT cuts do increase investment demand. (I do not know whether this is true or not.)"
My point is that they might, even if there's no direct link. In much the same way that 'longer copyright is part of a general system of incentives' that serves to attract pro-IP industries even in the absence of any instant payoff as a result, cheaper corporate tax rates might attract investment as part of a general system of incentives by signaling support for more private sector activity, even if the cuts don't *alone* serve to increase investment.
--NR: "But, exactly the same effect could be achieved by the Bank of Canada cutting the rate of interest."
Sure, but...
--NR: "If the Bank of Canada wanted to increase AD, under current circumstances, it would have set a lower interest rate. But it didn't. Therefore we can conclude that *if* the CIT cut increased AD, the BoC would simply raise the interest rate to get AD back to where the BoC wants it to be."
...I suspect they do want increased AD, but they're trapped by those current circumstances. After all, they're already keeping a ridiculously low interest rate in place, almost grudgingly. But it seems (rightly, in my view) that the BOC thinks growing demand through even lower interest rates in the absence of consumer debt restraint with a peak credit market and a peak housing market will cost us in the long run more than it gains in the short run. If CIT cuts do increase demand, the distinction would be that the consumption & economic activity it'd likely create would be in theory more 'real' and more sustainable, relative to the credit-fueled alternative. Which is, I admit, an argument in favor of CIT.
--NR: "In the long run, assuming CIT cuts increase savings and investment at the expense of consumption and/or net exports, the capital stock will eventually be higher. That may (or may not) increase the demand for labour. Given a long run Natural Rate of Unemployment, that would increase real wages. Which is good. But it comes at the cost of reduced consumption and/or net exports. There's a cost. If we wanted increased savings and investment, we could just subsidise them."
Sure. You're only proving my point further, which is that there are policy choices involved here, so it's a stretch to portray CIT cuts as one-dimensional either in terms of costs or impacts. I'm sure Stephen gets that, but that isn't at all what he said above.
--NR: "Not that I've spent a lot of time thinking about the CIT, but generally I would be in favour of cutting it. But my support has nothing to do with creating jobs."
Fair enough. My point isn't about your support though; my point is that Stephen is boldly arguing that it's simply not right for *anyone else* to support them for that reason either.
PS: Now I remember why I stopped coming here awhile ago. This font is designed for 70 year olds! :-)
Posted by: Stateofthecity | January 30, 2011 at 03:22 PM
@ thomas, sorry, just caught your comment.
And, fair enough, but if that's the case, he should make that argument. And I'm still torn on that productivity issue.
While it's obviously more complicated than this, in general, more productive economies create more jobs in the long term for a long list of obvious reasons, even as they shed jobs for individual tasks made obsolete by the gains in productivity. So while I think it's fair to be *skeptical* about productivity-employment links, especially in shorter windows, I'm just saying it's going way too far to talk as though anyone who argues there's a link at all is totally delusional.
Posted by: Stateofthecity | January 30, 2011 at 03:31 PM
"Otherwise, it is curious note, again, to what extent the Canadian left--such as the New Democratic Pary (NDP)--has become immune to policy developments in the Nordic social democracies.
Just as it is curious to note, again, to what extent the Canadian right--such as the Conservative Party (CP)--has become immune to the much higher unionization rates in the Nordic social democracies.
Posted by: Robert McClelland | January 30, 2011 at 03:43 PM
Speaking of Nordic unionization rates, the Nordic countries use the Ghent System of employment insurance where EI is voluntary and administered by unions, not the government. You join a union to get EI.
Posted by: Determinant | January 30, 2011 at 03:52 PM
"3. Corporate taxes are already 'competitive'. This is the same thing as saying that Canada is already rich, so why bother trying to increase our incomes?
Not the same thing at all. Competitiveness is a relative concept, 'richness' as you are using it here, is an absolute concept. Two totally different scenarios. Sports teams typically rest their best players when they have first place or a playoff spot wrapped up.
I guess if you can first get people to stop saying we need to cut corporate taxes to become competitive, *then* you might be able to get people to stop responding that they are already competitive. Good luck with that.
"4. Corporate tax cuts are part of a 'race to the bottom'. This point confuses 'low corporate taxes' with 'low overall taxes'. The most successful social democracies have long understood that the recipe that reconciles high economic growth rates with high government spending includes low corporate tax rates."
I'm not sure how this proves anything other than that the Nordic countries got out in front on this race to the bottom. 'Race to the bottom' dynamics seem consistent with a tax system where the burden is inversely proportional to mobility.
"5. Rescinding the corporate tax cut will help fight the deficit. If it's government revenues we need - and I agree we need them - then the CIT is the worst way to raise them. Even if we set aside the effects on income and wages (and we shouldn't), the effect on the budget balance of a CIT reduction of 1.5 ppt is on the order of $1b-2b - less than one percent of the federal budget, and only a fraction of the structural deficit we have to deal with. The best way to a balanced budget is to rescind instead the cuts to the GST."
Not sure this means it is the worst way to reduce the deficit, just that it is not sufficient on its own. I don't see any reason why closing the structural deficit has to be done via just one tax rather than a mix of different ones. Political feasibility would seem to argue in favour of raising the ones most saleable to the public, which would push cancellation of planned corporate tax cuts to the front of the queue.
With respect to 1 and 2, I agree, but as I've pointed out here before, as long as we operate an economy in which unemployment is used to control inflation - leaving jobs in a perpetual state of shortage, then people will always vote for measures that they mistakenly believe can fix the permanent job shortage.
Aside:
""David Peterson raising the RST back in 1988 and nobody much cared."
People cared so little, the Liberals weren't in power in Ontario again for 15 years.
Posted by: Declan | January 30, 2011 at 08:01 PM
"David Peterson raising the RST back in 1988 and nobody much cared."
People cared so little, the Liberals weren't in power in Ontario again for 15 years.
I'd like to sell you a rock that keeps tigers away.
Posted by: Mike Moffatt | January 30, 2011 at 09:26 PM
I suppose you'd also like to explain to us how R.B. Bennett creating the Canadian Radio Broadcasting Commission caused the Federal Conservatives to be out of power for 3 decades.
Posted by: Mike Moffatt | January 30, 2011 at 09:31 PM
The Australian Treasury recently reviewed Australia's Tax System (see: http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm). According to Treasury:
"... a balance needs to be struck between (i) the benefits of a lower rate in attracting ... mobile investments or capital; and (ii) the benefits of a higher rate in reducing opportunities for domestic residents to ... reduce their tax on personal income, and in taxing the returns to less mobile investments or capital"
There is a discussion (in the Chapter on Company tax) on international tax competition and the desirability of international tax harmonisation. The Treasury concludes:
"Australia should not be at the forefront of any "race to the bottom" in company income tax rates. International tax coordination is required to support cross-border income taxation, particlarly the effective exchange of information to allow for the enforcement of taxes on the savings income of residents."
Posted by: Kien | January 30, 2011 at 09:34 PM
Jim Sentance:
Is a 40% marginal effective tax rate believable for you in the case of Canada? It is not even on the right order of magnitude for me ...
Just consider the number cited for Ireland: 13%. We know it for a fact that Pfizer, Microsoft, Apple, Google, Intel et al funnel most of their revenue through Ireland and the Netherlands and pay an effective 0.1% US corporate income tax as a result ...
Some real calculations would be nice - how much money in, versus how much real money/value out to owners, versus how much corporate tax paid, globally. Regardless of how the 'money out' path is implemented: profits buffered, shifted offshore, share buy-back, dividents, life-style services to owner-CEO's, mergers/buy-outs, etc.
Posted by: White Rabbit | January 31, 2011 at 05:31 AM
Can someone explain to me why corporate tax rates matter? If things are properly integrated, doesn't the dividend tax credit exactly offset whatever taxes are paid by the corporation, with the dividend then being taxed at the shareholder's personal tax rates?
So maybe as a holding tax (from the time income is earned to paid out as dividends) it affects things (and lowered Retained Earnings may mean less investment), but it doesn't seem like it's that important a factor.
Posted by: PacManager | January 31, 2011 at 10:10 AM
How much is that rock gonna cost me Mike?
Posted by: Mark | January 31, 2011 at 10:13 AM
"Can someone explain to me why corporate tax rates matter? If things are properly integrated, doesn't the dividend tax credit exactly offset whatever taxes are paid by the corporation, with the dividend then being taxed at the shareholder's personal tax rates?"
The dividend tax credit more or less offsets the corporate level income tax (although it does so imperfeclty depending on the province of residence of the taxpayer and the provinces in which the corporation pays corporate income tax). But, ask yourself this, are all Canadian corporations owned by taxable Canadian resident individuals (other than trusts) who can claim the dividend tax credit (or corporations who can receive inter-corporate dividends tax free?). If so, you're right, the corproate tax rate doesn't matter.
Or, are Canadian corporations, to a large degree, owned by non-residents and non-taxable Canadian entities (pension plans, RRSPs, etc.), neither of whom benefit from the dividend tax credit. I
Posted by: Bob Smith | January 31, 2011 at 01:08 PM
I work for a company that advises companies on tax efficient structuring, among other things. At the margins, I don't think a 1% change in corporate tax rates makes much of a difference. In the big picture though, a lower corporate tax rate in Canada (relative to other countries) encourages companies to incorporate here. Over time, this can affect the level of capital formation in Canada.
As for the connection between corporate tax rates and jobs, I agree that the connection is tenuous. Even though countries like Bermuda, British Virgin Islands, and the Bahamas have low corporate tax rates, it does not mean that they generate huge numbers of jobs. Instead, corporations are often structured so that the risk, and the associated rewards, are earned offshore in a low tax jurisdiction, but routine (and often labour-intensive) work is done where ever it is economical. It is generally not economical to have your administrative headquarters in a tax haven, because tax havens have small populations who are often ill-suited to do the administration that the corporation needs. Ex-pats demand big salaries to move to a tax haven. Also, tax havens has small domestic markets and weak infrastructure connections with other countries. Activites, such as sales and manufacturing are unlikely to be done there.
In the long run, lowering the corporate tax rate is likely to encourage companies to base more higher value-added activities in Canada relative to other countries. This may not create raw jobs, but it may shift the structure of the job market towards higher value-added jobs and away from menial jobs over time. This increases productivity and output.
Posted by: Robillard | January 31, 2011 at 04:04 PM
“the effect on the budget balance of a CIT reduction of 1.5 ppt is on the order of $1b-2b”
Where are you getting those numbers?
Finance Canada estimates that it is more like $3 billion (see Table 3.5).
Posted by: Erin Weir | January 31, 2011 at 05:41 PM
A non-taxable entity that owns stocks forfeit the dividend tax credit thus not recovering the CIT already paid. Whatever they think, they pay taxes...
As Jack Warner once said "Nobody knows nothing."
Posted by: Jacques René Giguère | January 31, 2011 at 06:45 PM
Gee Erin, do you think anything might have happened since the fall of 2007 that might have affected corporate tax revenue and therefore the cost of corporate tax cuts? Like, maybe, a recession and a sharp drop in corporate income and oodles and oodles of losses to be carried forward. There's no doubt a perverse irony there for you. The harder corporations get hit by the recession, the easier it is to cut their taxes.
In any event, I suspect the $1-$2 billion estimate is probably based on recent reported estimates by the Department of Finance (which you seem to accept as a credible source) putting the cost for 2011-12 at $1.6 billion. Now, I freely confess that I can't find the original document from finance that has been so widely cited (though, I equally freely confess that I haven't put much effort into doing so), but I've seen the same figure cited by the Liberals (who, I presume, perhaps optimistically, might do some fact checking on the issue), so I'm prepared to accept that it isn't just a figment of some copy writer's imagination.
Posted by: Bob Smith | January 31, 2011 at 07:19 PM
Gah. Not one, but *two* italics tags left open. Fixed.
Erin, I meant to refer to this post, but I forgot.
Posted by: Stephen Gordon | January 31, 2011 at 07:55 PM
The numbers in Budget 2009 also suggest that cutting from 18% to 15% would cost almost $6 billion annually. I have seen the Liberals cite that same figure, which implies about $3 billion for a 1.5% cut. (Of course, those numbers assume that profits will recover rather than staying at recession levels.)
Posted by: Erin Weir | January 31, 2011 at 08:00 PM
Stephen, I was responding to Bob before seeing your comment.
Posted by: Erin Weir | January 31, 2011 at 08:07 PM
I think it is important to flag your assumption that CIT cuts will increase profits so much as to offset about half the static cost. That’s how you get from Finance’s estimate of $3 billion to your estimate of $1-2 billion for a 1.5% CIT cut.
It’s also worth noting that the general CIT rate is going down by 7.1% from 2007 (including the surtax abolition). As estimated in the Budget 2009 table linked in both of our links, the CIT cuts will ultimately cost more per year than the GST cuts.
Posted by: Erin Weir | February 01, 2011 at 08:39 AM
It's not just - or even primarily - increases in pre-tax profits. It's also increases in PIT and other revenues as income and wages increase.
eta: And there's also the tax-shifting arguments.
Posted by: Stephen Gordon | February 01, 2011 at 10:00 AM
The tax-shifting arguments should translate into higher pre-tax profits, with multinationals reporting more profits in Canada when the CIT rate falls. I have seen no evidence of that happening on an appreciable scale. However, by including potential positive effects on other tax bases, you are making a better argument than the Conservatives.
Posted by: Erin Weir | February 01, 2011 at 10:52 AM
"I'd like to sell you a rock that keeps tigers away."
Any blog can have commenters who respond to objections by sarcastically insulting the intelligence of the person who made the comment, but only on blogs of quality can you get the authors themselves to do it, I guess.
Anyway, here's a nice summary of the 1990 election from The Canadian Parliamentary Review.
Let me quote,
"The "teflon premier" whose popularity was at 50 to 60 percent throughout most of his 5-year term became the politician everyone loved to hate during two largely uneventful summer months of 1990.
...
The manifest factors were taxes, the Patti Starr affair, and the timing of the election. There had been hefty rises in Ontario property taxes in the last 2 years. Queen's Park bumped the provincial sales tax to a record 8 percent (then promised to reduce it back to 7 percent during the campaign). These were important irritants to an electorate."
But hey, I'm sure if you email the author Jim Henderson some weak insults, that will make it all not true. After all,he was only a Liberal MPP from 1985-1995, why would he know anything about why the Liberals lost power during that period?
Or maybe you should send some one-liners to Peterson himself - after all, he was clearly deluded about the impact of the tax hike - otherwise why would he have suddenly promised to rescind it during the campaign, given that nobody cared?
Posted by: Declan | February 02, 2011 at 01:17 AM
I always here defenders of corporate tax cuts talk about "attracting more capital from abroad", but I wonder if they miss the bigger impact. Lower corporate taxes free up more corporate profits to be spent on expansion, innovation and dividends. My sense is that even for a small, trade-reliant country like Canada, the second impact is bigger than the first. Can anybody shed some light?
Posted by: hosertohoosier | February 02, 2011 at 05:11 AM
Actually, corporate taxes don't seem to affect FDI from foreign-based corporations (see this post). What it does attract is investors' saving, from Canada and from abroad.
Posted by: Stephen Gordon | February 02, 2011 at 05:53 AM
I have seen no evidence of that happening on an appreciable scale.
You do realise that the story you tell in that analysis is one of post hoc ergo propter hoc, yes? You need the counterfactual.
Posted by: Stephen Gordon | February 02, 2011 at 05:57 AM
Do you know the counterfactual?
Posted by: Erin Weir | February 02, 2011 at 07:08 AM
You need a model and/or a control. Plus standard errors. Policy analysis is hard.
Posted by: Stephen Gordon | February 02, 2011 at 07:11 AM
Erin's got a really good post about features that should be incorporated into CIT models, that could change the results. I agree with him that they need to be considered. That's the kind of work a larger budget PBO could and should do.
But Erin, don't you think it's a little ironic to be calling for models that consider *more* factors, while touting the results of your model that takes absolutely nothing into account?
Posted by: Mike Moffatt | February 02, 2011 at 08:06 AM
Thanks for the good word, Mike. If you guys do not know the counterfactual either, how can you be so confident of the virtues of corporate tax cuts? It seems that the burden of proof should be on those who want to devote billions of dollars to corporate tax cuts.
Posted by: Erin Weir | February 02, 2011 at 10:33 AM
"If you guys do not know the counterfactual either, how can you be so confident of the virtues of corporate tax cuts?"
Through the (albeit imperfect) research, that's how. Could the research be wrong? Absolutely. But it's the best we've got.
Posted by: Mike Moffatt | February 02, 2011 at 10:39 AM