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Such a fiscal policy is irrational? In a money economy yes. For the human brain, no.
As I pointed out yesterday, the human brain is wired for Austerianism.
The mammoth ( or caribou) economy is even simpler than the coconut one. At least the coconut ecn allows for saving and investment in inventory. Without conservation means,you can't save.
If the hunt is bad,(maybe a snow storm) you might retrench, live on your fat and wait for the good times to return. Then you hunt all you can. Your thinking is inherently countercyclical.
There is a large First Nations population in my area and that's how these student's grandparents managed their cariboo economy.
The macro economic reasoning is not only very recent but unlike most part of micro, it goes against a human biology that has not caught with its cultural evolution.

To remark upon the larger context.

I'll be in favour of corporate income tax rates like the Scandanavian countries when you can deliver me a political structure and climate like them as well.

Probably the best one-sentence exposition of the intellectual failure of the Canadian Left.

Sorry, Stephen, if this is an intellectual failure, it is an intellectual failure of Canadian politics, and not the intellectual failure of "the Left" (which, after all is said and done, I suppose I grumblingly identify with). You may as well blame economists for the intellectual failure, since they have failed to persuade.

I'm all for a rational and evidence-based redistribution of federal tax burden. (I assume that the recent discussion of CIT cuts refers to federal CIT, incidentally). I would love to have a more growth-friendly tax mix. But as no political group in Canada is prepared to deal with taxes and spending honestly, it is patently unfair to blame "the Left" when people simply refuse to engage with the idea of something like CIT cuts. We won't in fact be engaging in a redistribution of the tax burden, in fact we won't even be really doing tax policy at all; instead we will be engaging in fiscal policy by other means.

I think it's quite rational to say no, I won't play along with a tax cut that isn't being offered as a means to an end, but instead is treated as simply an end in itself. Now I don't happen to agree - as it happens, I'm not opposed to the CIT cuts since I think the bad political result is compensated by the hoped-for improved economic result.

I don't understand you're harsh criticism of that sentence. It is still basically consistent with what you've written here:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/03/partisan.html

Maybe you misunderstood the use of the word "you" in the sentence. It isn't the personal "you". It's a colloquial, impersonal, "you". Translated: "I'll be in favour of corporate income tax rates like the Scandinavian countries if Canada valued its citizens more equally, and allowed a respectful discussion of economic tradeoffs not dominated by right-wing economic tropes"

You're already written, correctly, that scandinavian countries have low corporate tax rates, and higher vat and income taxes. Jim Rootham notes that in Canada right now, that discussions of raising the GST or income taxes are ridiculed or given the silent treatment in the media and parliament (similarly, with the Carbon tax).

Cutting corporate income taxes, without doing something to replace the revenue they generate, will result in more of what we have: exploding deficits and withered social programs. Right now, in Canada, in our current political climate, that could be what will result.

I understand why you're a bit angry about the comment, because it isn't on topic, and it represents a common problem on blogs that no discussion on economics can progress unless every topic since Marx is brought into it and hashed out, often pointlessly.

But you should make that point a bit more diplomatically, or else do what a lot of blogs do, and move comments to off-topic threads.


--

"no political group in Canada is prepared to deal with taxes and spending honestly"

I think that's true to an extent. There's also a lot of ignorance.

I've discussed this with colleagues, who are not as a rule stupid people, but they aren't economists, have little interest in economics other than "do I have enough money" (answer: no). But they do seem to partition into two disjoint sets, and it correlates pretty strongly with the extent to which they perceive their wellbeing being tied to the firm for whom they work.

If they are a manager, have high income, probably have investments, they are in favor of a CIT cut. Why? Because if the firm makes more profit - even if it's the result of a one time reduction in taxes - they get to snatch a few more cookies from the cookie jar.

If they aren't a manager, have lower income, have no savings/investments, they figure it isn't fair that the firm - as represented by their boss who earns 100x what they make - pay less tax while they pay more or the same. It *feels* to them like rich people getting richer by screwing the poor.

In both cases I've tried explaining that firms are not like people - they aren't 'wealthy', that capital is mobile, that Canada is a small open economy, that the burden of paying CIT shows-up as lower investment, lower wages and higher prices, and that we'd be better off shifting taxes from income to consumption and/or other stuff we want less of anyway (like carbon). By the time I finish, I'm talking to myself. It could be that I'm really that boring. Or it could be that most people just don't have the spare brain cycles to apply to the issue, so they fall back on intuitive (and wrong) reasoning.

Like Patrick ,I discuss long and often with my students and colleagues on why consumption taxes would be better and that CIT anyway doen't really exist ( shifted to others and Modigliani-Miller stuff) and so on. Then I remind them that even if they do understand, 99.9% of the populace won't. And that as a rather highly placed militant in a political party, in the next election campaign I will publicly denounce the CIT cut. Some smile or laugh, some cry. Most get the irony.

Just a quick reality check:

The Canadian corporate income tax is primarily a withholding tax.

When a corporation pays dividends, the corporate income taxes paid are refunded to the shareholder in the form of a dividend tax credit.

If a corporation doesn't pay dividends, and instead accumulates retained earnings benefiting the shareholders in the form of capital gains - again, the capital gains receive preferential tax treatment, compensating for the corporate income tax paid.

O.k., it isn't always perfect - sometimes the dividend tax credit over-compensates for corporate income tax paid sometimes it under-compensates.

But generally we have something fairly close to an integrated personal/corporate income tax system.

I just don't see, given the degree of integration that already exists, why we should expect to see some big productivity gains resulting from further reductions in the corporate income tax rates.

If anything, reduction in withholding taxes would encourage corporations to retain earnings, stopping capital from flowing to its most productive economic uses.

Okay, that's a real argument; what I was responding to wasn't.

I take those points, which is why I'm not campaigning to go to zero in one go. As far as we know, we're still in the region where CIT cuts increase investment.

I'm open to the idea that there's a lower bound for CIT rates; I just don't think we're there yet.

"If a corporation doesn't pay dividends, and instead accumulates retained earnings benefiting the shareholders in the form of capital gains - again, the capital gains receive preferential tax treatment, compensating for the corporate income tax paid."

Don't we also need to take into account that an increase in stock price is not a realized capital gain until the shares are sold, or am I missing something here?

I second Frances’ comment.

Furthermore, Mike’s post inadvertently hits on another argument against CIT cuts. CIT is itself hugely countercyclical, drawing much more revenue out of the economy during booms when profits are high than during recessions when they are low. Reducing the CIT rate erodes this automatic stabilizer for future business cycles.

A question for which I don't know the answer: are there empirical investigations into the issues Frances raises?

Erin: Yeah, I think it's a fair point. Of course, if people keep wanting to raise taxes as we come out of a recession to fight the deficit then that property of the CIT is a bad thing. We can't have it both ways.

Stephen: Seconded - I'd love to read such a study.

Stephen, over at the PEF blog I have posted recent mildly skeptical comments on the CIT rate cut issue by David Dodge and Philip Cross at Statscan who presumably count as credible economists rather than stalwarts of the left or political axe grinders.

I do, by the way, take your point that social democratic countries have and indeed must have broadly based tax systems. I just think CIT should be in there as part of the mix, and that cutting the federal rate from 28% to 21% is a step too far.

Also, if the intent is to raise investment, accelerated depreciation is a more powerful lever than cutting the statutory rate, as research by the Department of Finance and most CGE models suggest.

Whoops, I meant 28% to 15% of course.

"I do, by the way, take your point that social democratic countries have and indeed must have broadly based tax systems. I just think CIT should be in there as part of the mix, and that cutting the federal rate from 28% to 21% is a step too far."

When the CIT drops to 15%, the combined general rate in Ontario will be 26.25%. In Sweden? 26.3%. Of course, there are a lot of other factors to consider beyond the stat. rate. But the move doesn't look unreasonable when you do a Canada-to-Nordics comparison.

That should be when the *Federal* CIT drops to 15%.

Mike, your point about unrealized gains is a very good one, as is Frances's point about integration. It is worth noting, though, that moves to reduce CIT will not be met with a reduction in capital-gains inclusion (the long-term trend is in the other direction and there are no plans or calls to raise inclusion rates from 50%). So in the public context, reductions in CIT will discourage dividends - what few there are - and encourage even more retention of earnings. This has the effect of reducing public savings that can be put into investment and into the market.

It's worth noting, in the context of these conversations where dividends come up a lot, that public corporations, at least, just do not pay dividends. Rather, they don't pay significant dividends. If they did, there wouldn't have been such a flurry of interest in income trusts from the public - but the thought of a business actually paying profits out to its owners rather than retaining it to be spent by managers was enormously popular and successful with investors.

For the majority of dollars subject to CIT (I don't know how vast the majority but it is a majority) they never see a dividend. They are never subject to full tax realization. It's something to be kept in mind.

Of course, Ontario’s provincial rate falls to 10% the following year, for a combined rate of only 25%.

Of course, trying to make a point, I put my foot in it. They don't pay common share dividends, of course, They do pay their preferred share dividends, naturally.

"Of course, Ontario’s provincial rate falls to 10% the following year, for a combined rate of only 25%."

Still in the same ballpark. Unlike, say, VAT, where Ontario is 13% and Sweden is 25%.

This whole conversation strikes me as highly ironic, where I'm arguing our tax structure should look more like Sweden, whereas people to my political left think we should look more like the United States.

You know, the more I think of all the reasons why the standard story about corporate taxes might be attenuated, the more the question is: why do the data consistently show a positive relationship between CIT cuts and increases in income, investment and wages?

It maybe without those effects, the estimated link would still be stronger. But that doesn't mean the link isn't there.

Mike good to know you are advocating a top marginal PIT bracket of 60 and 30% across the board on capital gains.


Sweden = CIT is 26%, PITs 29 - 59%, VAT 25% (12% on food) Cap gain 30%.

The top PIT for Canada (PEI) is 45.7% and Cap gain 22.5%

It wouldn't be my first choice (or 2nd or 3rd, etc.), but I wouldn't be wholly against funding a CIT cut through a rise in marginal income tax rates for high earners.

So I'm not sure what your point is.

To Frances' point on tax integration: a very large portion of the capital in the world is not eligible for the dividend tax credit, namely non-residents, pensions and endowments, and registered savings plans.

On the point that the reduction in dividends anticipated by reducing the CIT means less flow of capital to be redeployed, we're forgetting the other significant mechanism used by firms to distribute their retained earnings: share repurchases. Every dollar spent in this way will either be consumed or redeployed (or paid in capital gains taxes), just as with dividend payments. There are a number of reasons why this mechanism has become increasingly popular, and corporate taxation does not seem to be a driving force. It seems to stem more from how managers are compensated (on the increase in share price), as well as the flexibility of share repurchases, which can be ramped up or reduced without the same kind of fallout and futures obligations that changes in dividend policy seem to cause.

My point is that every time (nearly) you guys say lets do the Swedish tax dance you then cherry pick and act as though we do not need to talk about the Swedish tax regime. The Swedish tax system is designed to reward investment and punish the accumulation of wealth outside of the enterprise. If that is what you want then fine. But that is different than saying you want to be more like Sweden which simply means lower CITs and Higher VATs. That is not the Nordic Tax model.

Andrew F's point about the non-integration of the corporate income tax system with respect to non-taxables (pensions, rrsps, etc.) and non-residents is an important one. In theory the CIT is a withholding tax, in practice, it is a real tax cost.

Some of you will probably know these numbers (or, at least, where to find them), but what percentage of Canadian corporations are ultimately owned either by foreigners or non-taxables (CPPIB,Teachers Pension Plan,the Caisse,etc.)? I'd be amazed if it were much less than 50% and would not be the least bit surprised if it were significantly higher. Although Canada has taken significant steps towards improving the integration of the CIT/PIT system over the last decade for taxable investors (which, ironically, has meant that the effective tax rate on dividends has been increasing as corporate tax rates have fallen), that doesn't deal with a huge chunk of Canada's capital market.

Bob here is a partial response to your query.

In 2006 For every dollar of profits distributed to shareholders only 42 cents were distributed to Canadian shareholders.

Thus we can surmise that it is much more than 50%.

These StatCan figures do show corporate Canada paying out more dividends to non-residents than to Canadian residents.

Travis, Erin

That makes sense, thanks. And, of course, Canadian shareholders would include pension plans, RRSPs, RRIFs and other tax-exempts. So, in practice, only a small minority of shareholders are likely to be taxable Canadians who can benefit from the dividend tax credit.

However, not all investment is financed with equity (i.e. selling shares). A great deal of investment is financed with debt. Since corporations deduct interest from taxable profits, corporate taxes do not touch the minimum returns needed to cover the cost of debt capital. That is true regardless of who owns shares.

So, between the dividend tax credit (for some equity) and interest deductibility (for all debt), I contend that Canadian corporate taxes generally do not affect the minimum returns needed to justify marginal investments.

In those stats for 2007 - 2010 it is running from 70 - 60 % paid out to CDNs. I imagine as the cycle picks up those figures will come down again.

Erin,

Yes, some companies are financed by debts to some degree or another. However, the last time I checked, the debt-equity ratio (at book value) for Canada's non-financial corporations was in the order of magnitude of 0.5-0.6 (http://www.statcan.gc.ca/daily-quotidien/101213/dq101213a-eng.htm), meaning that equity was still the primary means of financing Canadian corporations. By a fair margin. And, as we've already established, the dividend tax credit is only relevant for a minority of the equity investors in Canadian corporations.

I think you might want to revisit your contention.


So I'm the first MMTer to jumo in and note that taxes are not about "revenue" and only about controlling demand? And since CIT is a particularly inefficient way to do that, I'm all in favor of abolishing them (just cutting the rate, it seems to me, still leaves the whole apparatus of accountants and tax lawyers in place, with all of their effects on real output - just get rid of it).

You know, the more I think of all the reasons why the standard story about corporate taxes might be attenuated, the more the question is: why do the data consistently show a positive relationship between CIT cuts and increases in income, investment and wages?

Resource boom. Investment decisions are much more sensitive to forecast price for commodities and labour. The fact that the CIT cuts in Canada over the past decade coincides with this boom complicates the picture.

Frances:

I am interested in what you are saying. Do you mean that the government actually gets no net benefit from corporate taxes when the deductions are taken into account? If so, why not just scrap it all and save the paperwork?

How are foreign investors treated?

Jimbo: you're righr that in an ideal world, the only role for the taxes and expenditures of the central government ( the one with money-creating authority) is to control AD. If they also buy something useful (schools...)and discourage bad (pollution...) so much the better. And the CIT, about the most absurd and inefficient system ever devised should go. That's economic science.
In the real world, almost all taxes and expenditures are there to send a political message.
CIT "proves" that some people pay "too much" or "not enough". That neither proposition is true or false because it is irrelevant is beside the point.

Building a big bridge in the middle of a village with a very small river can show that your government cares about you or is a wasteful spender, according to the citizens mood, which can vary from time to time. It is never about engineering.

I was overly terse in my statement, so it is not surprising that Stephen did not understand it (also there is some history between us, so neither of us should be considered disinterested observers when it comes to each others statements).

Stephen is commenting on the economy, I am commenting on the political economy. These are not the same. Economics deliberately does not say anything about power. However, all economic changes and activities do have power effects. If you really want to give intellectually honest policy advice, you need to consider the power effects.

The power relations in Canada are quite different from the power relations in Scandanavia. The electoral systems are different, the unions have vastly different powers. Corporations may not be repositories of wealth, but they are certainly repositories of power. A CIT cut means that profitable corporations have increased retained earnings, and they can use that pool of money to exercise power. BCNI, Taxpayers Federation, etc.

Also, when you are evaluating CIT effects GDP per capita is the wrong measure. If the effect is to transfer more money to senior brass (which I think we have determined are the big income earners in Canada) the result is bad. Do you know if anyone has run that study using median income as the output? Or better yet, bottom decile?

Ricardian equivalence is inadequate to express the ethically sound result. You have to consider the declining marginal utility effects (at a minimum). This is why your analyses of tuition and child care fail.

@Bob Smith

Very little investment in corporations flows through the stock market. Check how much treasury stock gets issued. Most equity is from retained earnings. In my business (software) the stock market is where you go to cash out, not where you get money to do stuff.

Sorry Jim, original assessment still stands. Nothing has been learned in the past 40 years.

Now you are getting too terse. :)

Are you making the claim that reducing the CIT will make Canada less plutocratic?

BTW, the best work I know of on power is JK Galbraith's "A Taxonomy of Power". Highly recommended.

Jim Rootham said: "Very little investment in corporations flows through the stock market. Check how much treasury stock gets issued. Most equity is from retained earnings. In my business (software) the stock market is where you go to cash out, not where you get money to do stuff."

I'm not sure what comment of mine you're responding to, or what the point of your comment was.

Your reply to Erin wherein you talk about debt equity ratios.

But the discussion of debt to equity ratios had nothing to do with the stock market. For a lot of companies (particularly start-ups) new equity financing occurs on a private placement basis (to institutional investors, private equity funds, etc.) or through inter-company financing (i.e., foreign parent investing in Canadian subsidiary - in fact, equity financing is particularly important in this context, because of Canada's thin capitalization rules).

In any event, since the debt-to-equity ratios I referred to includes both new equity issuance and retained earnings (check the link), I'm not sure how your point modifies mine.

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