How much new revenue would be generated by an increase in federal corporate taxes?

I've decided to revisit this post from last year. The background context is the Conservative government's 'starve the beast' agenda - documented by me here and here, by Livio here and by Paul Wells in his excellent new book. The Conservatives have made two significant tax cuts during their time in office. The GST rate was reduced from 7% to 5%, and the corporate income tax (CIT) rate continued the downward trend begun during the Chrétien-Martin years: the statutory rate went from from 21% (22.1% with the surtax) in 2006 to 15% (no surtax) now. So far, the only tax cut anyone seems to want to rescind is the CIT. The NDP has already said as much, and the Liberals may or may not follow suit as they did in 2011.

The other reason for revisiting the issue is that in my earlier post, I set aside the existing Canadian studies on the elasticity of taxable income and used more conservative estimates. I now think this was a mistake, for two reasons. The first is that the long-run effect of variations in the corporate tax rate on corporate tax revenues looks to be about zero:

 

[Data sources are the Fiscal Reference Tables and the OECD Tax Database]

So I was probably wrong to low-ball Canadian firms' propensity to reduce taxable income when tax rates increase. The unconditional correlation between federal CIT rates and federal CIT revenues (as a percentage of GDP) is actually negative.

The other thing is that had I skimmed through Bev Dahlby and Ergete Ferede's International Tax and Public Finance article too quickly: I didn't realise that they had broken out the effects of changes in provincial and federal CIT rates. (The reason for separating them is that since it's easier to shift income across provinces than it is to shift income in and out of Canada, firms are likely to react more to changes in provincial CIT rates than they do to federal rates). I'm going to use their model and estimates in what follows.

The basic model looks like

[log of tax base]_t = η • [tax rate]_t + λ • [log of tax base]_t-1  + controls

This time, I'm also going to take account of the dynamics in that λ coefficient, especially since any sort of tax proposal in the next election campaign will include projections over a four-year horizon.

The Dahlby-Ferede estimates (standard errors) for η and λ are -1.657 (0.379) and 0.602 (0.084), respectively. I'll use 2013-14 corporate tax revenues as a base case (denoted by year 0 below): $34.986b from a tax rate of 15% implies a corporate income tax base of $233.24b.

If Δt is the change in the tax rate, then change in the log of the tax base over time relative to the base case looks like:

[log of tax base]₁ = [log of tax base]₀ + η•Δt 
[log of tax base]₂ = [log of tax base]₀ + η•Δt(1 + λ)
[log of tax base]₃ = [log of tax base]₀ + η•Δt(1 + λ + λ²) 
[log of tax base]₄ = [log of tax base]₀ + η•Δt(1 + λ + λ² + λ³) 

In the long run, the new tax base converges to

[log of tax base]_∞ = [log of tax base]₀ + η•Δt/(1-λ)

As a sort of robustness check, I'll look at parameter combinations that are the main estimates plus and minus one standard error:

• (η, λ) = (-1.657, 0.602) - base case
• (η, λ) = (-1.278, 0.518) - weak response case (effect reduced by one standard error)
• (η, λ) = (-2.036, 0.686) - strong response case (effect increased by one standard error)

Another thing to consider is the effect on provincial tax revenues. Since both levels of goverment apply taxes to the same base tax, changes in the tax base induced by a tax change at one level will affect the revenues of the other level. I'll use 11.1% as the provincial CIT rate, which is the weighted average estimated by the OECD.

And as a point of comparison, I'll also include the 'static analysis' results, in which it is assumed that firms do not react to higher rates by reducing the tax base.

Here are the effects of increase the federal CIT rate by 3 percentage points from 15% to 18%: 

Revenue changes: Increase federal CIT rate from 15% to 18%

Year	Base case		Weak response		Strong response		Static case
	Fed	Prov	Fed	Prov	Fed	Prov	Fed	Prov
1	$5.0b	-$1.3b	$5.4b	-$1.0b	$4.5b	-$1.5b	$7.0b	0
2	$3.8b	-$2.0b	$4.6b	-$1.5b	$2.9b	-$2.5b	$7.0b	0
3	$3.1b	-$2.4b	$4.2b	-$1.7b	$1.8b	-$3.2b	$7.0b	0
4	$2.7b	-$2.7b	$4.0b	-$1.8b	$1.1b	-$3.6b	$7.0b	0
4-year sum	$14.5b	-$8.3b	$18.3b	-$6.0b	$10.3b	-$10.9b	$28.0b	0
Long term	$2.1b	-$3.0b	$3.8b	-$2.0b	-$0.4b	-$4.6b	$7.0b	0

 

In the base case, federal revenues start out as roughly 70% of the static analysis case, and converge to about 30% in the long run. By the fourth year, the increase in federal revenues is exactly offset by the reduction in provincial revenues.

What would happen if you increase the CIT rate by 6 ppts to bring it back where it was when the Conservatives elected?

Revenue changes: Increase federal CIT rate from 15% to 21%

Year	Base case		Weak response		Strong response		Static case
	Fed	Prov	Fed	Prov	Fed	Prov	Fed	Prov
1	$9.4b	-$2.5b	$10.4b	-$1.9b	$8.4b	-$3.0b	$14.0b	0
2	$6.8b	-$3.8b	$8.6b	-$2.8b	$4.9b	-$4.8b	$14.0b	0
3	$5.3b	-$4.6b	$7.7b	-$3.3b	$2.7b	-$6.0b	$14.0b	0
4	$4.4b	-$5.1b	$7.3b	-$3.6b	$1.2b	-$6.8b	$14.0b	0
4-year sum	$25.9b	-$15.9b	$34.0b	-$11.6b	$17.1b	-$20.6b	$56.0b	0
Long term	$3.2b	-$5.7b	$6.8b	-$3.8b	-$1.8b	-$8.3b	$14.0b	0

 

Revenues are higher with the larger increase, but they also decline faster. In the long run, federal revenues are less than 25% of the static case, and provincial losses are increased.

Finally, here's what happens when the federal rate is increased 9 ppts to 24%: 

Revenue changes: Increase federal CIT rate from 15% to 24%

Year	Base case		Weak response		Strong response		Static case
	Fed	Prov	Fed	Prov	Fed	Prov	Fed	Prov
1	$13.2b	-$3.6b	$14.9b	-$2.8b	$11.6b	-$4.3b	$21.0b	0
2	$9.1b	-$5.5b	$12.0b	-$4.1b	$6.1b	-$6.9b	$21.0b	0
3	$6.8b	-$6.6b	$10.6b	-$4.8b	$2.7b	-$8.5b	$21.0b	0
4	$5.4b	-$7.2b	$9.9b	-$5.1b	$0.6b	-$9.5b	$21.0b	0
4-year sum	$34.5b	-$22.9b	$47.4b	-$16.9b	$21.0b	-$29.1b	$84.0b	0
Long term	$3.5b	-$8.1b	$9.1b	-$5.5b	-$3.8b	-$11.4b	$21.0b	0

 

Probably the most striking pattern is just how quickly the dynamic effects kick in: 80% of the adjustment to the long run is done by the fourth year. Another is how small the long-run effect on revenues is compared to what the static model predicts.

So the answer to the question in the title is "Not very much at all."

 

Comments

[Robert McClelland]

So if basically no revenue is raised then we can declare that raising corp taxes is not harmful and stop obsessing over parties that want to do it. Right?

[Stephen Gordon]

Wrong. Corporate taxes are the most harmful to economic growth.

[Robert McClelland]

If it's a zero sum change as you claim then wherein lies the harm to economic growth?

[Stephen Gordon]

The issue isn't the tax revenues; it's the increase in the cost of capital produced by higher corporate taxes. This reduces investment, which in turn reduces output, incomes and wages.

[Nick Rowe]

My reading: you are estimating the slope of the Laffer curve in the neighbourhood of where we are. And your estimate is roughly zero. Which means, for any tax (except Pigou taxes) we should cut the tax rate. (If you found a positive slope we would not know whether we should raise or lower the tax rate to find the optimal point on the trade-off).

I am trying to remember the name of that theorem which says the optimal tax rate on all capital income is zero. (Though CIT isn't, strictly, a tax on capital income, but a tax on a particular form of economic organisation).

[Nick Rowe]

[Stephen: I just did a comment on my post, and it didn't appear. I checked the spam filter, and it says "0 comments"!]

[Stephen Gordon]

Yes, that's the efficiency argument. But there seem to be people who don't care about the efficiency argument and are concerned with revenues. I'm going to have to add a section my CIT reading list

[Frank Restly]

Stephen,

"The issue isn't the tax revenues; it's the increase in the cost of capital produced by higher corporate taxes. This reduces investment, which in turn reduces output, incomes and wages."

Output and capital costs tend to be positively correlated not negatively. Every cost that is paid is someone else's income.

[Min]

Frank Restly: "Output and capital costs tend to be positively correlated not negatively. Every cost that is paid is someone else's income."

They may be positively correlated if the tax rate is constant, but is that so if the additional cost is tax only? You can't really say that the Canadian gov't has an income.

[Frank Restly]

Min,

"They may be positively correlated if the tax rate is constant, but is that so if the additional cost is tax only? You can't really say that the Canadian gov't has an income."

The Canadian government has a source of income (taxes) and it has expenditures. From a nominal output perspective, increases in taxes that fund increased expenditures on goods and services (not transfers) will have a positive effect on nominal output (non-inflation adjusted). Real (inflation adjusted) growth may suffer though.

Imagine the Canadian government increasing the taxes of an apple producer and using those taxes to buy excess production from the apple producer. What happens to nominal output of apples? It would increase because the Canadian government has given the producer the incentive to produce and sell more nominal apples (either more apples at the same cost or the same quantity of apples at a higher cost).

[ianlee]

Stephen,

For the benefit of your readers:

During the research for my "Heads versus hearts: the ongoing debate over corporate income tax in Canada”, Bruce Doern, Editor, How Ottawa Spends, McGill-Queens Press 2012, I found a monograph by the remarkable Prof Richard Bird, "Why tax corporations?" from Dec 1996 which provided a nice survey of the literature. Bird stated:

"Economists are sometimes accused of agreeing on almost nothing and of never reaching a clear conclusion. Most readers have probably heard the joke about the policy maker who advertised for a "one-handed economist" on the grounds that his or her answer to any question would be less likely to be followed by "On the other hand...."

"One important policy question on which most economists appear to agree, however, is that there is very little to be said in favour of taxing corporations.1 Many would agree, for example, that the title of a recent paper – "The Corporate Income Tax and How to Get Rid of It" (Vickrey, 1991) – adequately conveys the main message of the extensive economic literature on this subject. The reason for such unanimity is primarily the substantial economic costs associated with taxes on corporations, although the uncertainty as to who really pays such taxes no doubt also contributes to the disdain in which they are generally held by economists."

His survey was brought up to date in the 2010 OECD, Tax Policy Reform and Economic Growth.

"This report discusses how tax structures can best be designed to support GDP per capita growth.The analysis suggests a tax and economic growth ranking order according to which corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes and then consumption taxes, with recurrent taxes on immovable residential property being the least harmful tax. A revenue-neutral tax reform that shifts the balance of taxation more toward consumption and recurrent residential property taxes could thus strengthen the growth of output over the medium term."

Those who support increases in CIT should read these two publications. The 2010 OECD report provides a review of a third of a century of peer reviewed research by central bank research economists, university economists and OECD in-house economists, that provides a compelling body of evidence for those persuaded by scholarly research.

[Patrick]

Any idea what the GST hike would need to be to make-up for the lost revenue if the CIT was set to e.g. 12.5% (total - same as Ireland)?

[Min]

Frank Restly: "increases in taxes that fund increased expenditures on goods and services"

That makes use of the Government as Household metaphor. But, unlike the case of a household, there is no intrinsic link between taxes and expenditures for the Canadian gov't, which is the ultimate source of the Canadian Dollar. Taxation removes money from circulation, Canadian gov't spending injects money into the economy. We may think of money flowing through the Canadian gov't, but in truth it is both a sink and a spring.

[Stephen Gordon]

Patrick: That would require provincial cooperation. The combined federal-provincial rate is 15+11.1 = 26.1%

Frank Restly: This isn't a zero-sum re-allocation of income. Increasing the CIT reduces investment and capital accumulation, which reduces total income.

[Patrick]

Ignoring practicalities, any idea what the GST rate would need to be?

[Bob Smith]

Stephen,

The other dynamic that gets missed a lot in the discussion of corporate income tax is the implication of its integration with the personal income tax system. One of the dirty little secrets (which no political party has been keen on discussing, each for their own reasons) in recent tax policy discussions is that while the corporate income tax rate has been going down, the personal income tax rate on dividend income has been steadily increasing in order to preserve the rough-and-ready integration of the two systems. One of the implications of this is that estimates of the revenue impact of corporate tax increases/decreases which focus solely on corporate tax revenue fail to capture the offsetting impact on domestic (taxable, i.e., excluding pension plans, RRSPs, etc.) shareholders (or, at least, domestic shareholders who receive dividends). Mind you, I'd have to think about the dynamic implications of that change (Do higher taxes on dividends reduce overall investment or merely shift investments between dividend-paying shares to growth shares, REITs, bonds, etc.? What is the revenue effect of that change?)

[Determinant]

Frank Restly: This isn't a zero-sum re-allocation of income. Increasing the CIT reduces investment and capital accumulation, which reduces total income.

That's a huge assumption. We're back to the old S=I argument, and it appears that you believe that S is always the limiting factor. But what if I is the limiting factor and we have excess S, for instance through accumulation of cash on corporate balance sheets that isn't invested? If we have excess S on corporate revenues, then CIT makes sense.

Furthermore, there is the distinction between nominal rates and effective rates; for corporations that is very large because of the greater amount of deductions allowed to businesses. As an extreme example, Canada had very, very high nominal CIT rates during WWII, however C.D. Howe allowed war investments (e.g. munitions plants, "his" projects) to be aggressively written off through Capital Cost Allowances (that munitions plant could be written off completely in three years). Therefore the effective CIT was much lower.

As a footnote, C.D. Howe invented the Military-Industrial Complex in Canada and this was one of his many tricks that made it work.

[Bob Smith]

"We're back to the old S=I argument, and it appears that you believe that S is always the limiting factor."

Except in a small open economy like Canada, S is never the limiting factor, because corporations can borrow on the global market regardless of domestic savings.

"Furthermore, there is the distinction between nominal rates and effective rates; for corporations that is very large because of the greater amount of deductions allowed to businesses."

Right, but that's really neither here nor there. The effective tax rate is a function of how you define the tax base and the statutory rate, Stephen's calculations of the impact of changes in the statutory rate is done given the existing definition of the tax base. In other words, he could do the same computations using changes to the effective tax rate, and would get the exact same results (given that the tax base is unchanged).

[Stephen Gordon]

Patrick: If the feds reduced the CIT from 15% to 1%, you'd need a GST of roughly 10% to make up for the loss of $30b in federal CIT revenues. OTOH, the provinces would find their CIT revenues increase by $20b/yr in the long run.

[Bob Smith]

"Ignoring practicalities, any idea what the GST rate would need to be?';

If Stephen's theory that the long-term elasticity of taxable income is roughly zero is correct over the entire range of possible corporate tax rates, you could reduce the corporate income tax rate to 12.5% (ignoring the complexity of the provincial/federal interaction) without any meaningful loss of revenue (in the long-run). Whether the long-run elasticity of taxable income remains zero over the entire range of the tax rate is obviously an open question.

[Stephen Gordon]

Yeah, it's generally not a good idea to push econometric models way outside the range of data used in the estimation. Those numbers were what the model gives with \Delta t = -0.14.

[Patrick]

Stephen: Thanks. 10% doesn't seem all that high.

[Bob Smith]

"Yeah, it's generally not a good idea to push econometric models way outside the range of data used in the estimation."

Which is fair enough.

On the other hand, in that scenario, a 10% GST rate would represent a net $20 billion in increased aggregate government revenue (factoring the increased provincial tax revenue). On the other hand, if you wanted to keep aggregate government revenue the same, you could get away with increasing the GST to 6-7% (and presumably compensate for the decreased federal revenue by reducing transfers to the provinces by $20 billion, leaving the provinces, collectively, in more or less the same position). Politically, that's not feasible for a host of reasons, but it's an interesting thought experiment (and it's probably makes for a better comparison with a unitary state like Ireland).

[The Keystone Garter]

Natural resources and finance are 85%+ of corporate profits in Canada. Where will investors and cdn corporate execs go: the Moon and lawyers in NYC masquerading as brokers? Except tech sectors and spending. I've not met one grunt that saved money. Not one.

[Bob Smith]

"Natural resources and finance are 85%+ of corporate profits in Canada. Where will investors and cdn corporate execs go: the Moon and lawyers in NYC masquerading as brokers"

And what percentage of Canadian shareholders are non-residents? Think they care whether they make their return from Canadian banks and mining companies or Chinese tablet makers and Greek shipping companies? There's nothing magical about making 99 cents from a Canadian mining company that beats making a dollar from a Chinese/Indian/American/Irish/Whatever company.

[Stephen Gordon]

Nor is there anything obliging Canadian investors to keep their savings in Canada.

[Patrick]

Lots of Canadians are indirectly investors/savers by virtue of having a pension. FWIW, this is my simplistic way of thinking about it: A high CIT rate is not chastising whom you think it's chastising. Top X percenters (where X is a small number) seem to be extracting a big chunk of their rents as wages. So they seem to have the power to set those. Higher CIT just leaves less for everything else (wages, investment, whatever). They'll continue to take whatever they can get away with and pass the shiv to the next back in line, until it hits someone who can't deflect it. Turns out, that'll be your Granny's RRSP, or your kid brothers wages at Starbucks.

If you want to chastise the corporate C-suite et. al. CIT is not going to do it. Capitalists and workers of the world will have to unite to fight that battle. Not holding my breath for that to happen.

In the mean time, if we might get a little wage growth for the middle and a few percent more GDP growth while maintaining or even increasing revenue, just by some relatively simple re-jigging of the tax system, then why not at least try? We don't have to go the whole hog all at once. Try it, and see if it pans out. Given the demographic challenges we face (pensions, medical costs, long term care cost, etc...), some additional wage and GDP growth certainly wouldn't go amiss. Seems silly to forgo this to in a futile attempt to chastise the wicked.

[The Keystone Garter]

"Nor is there anything obliging Canadian investors to keep their savings in Canada."

http://en.wikipedia.org/wiki/Canada_Deposit_Insurance_Corporation

"There's nothing magical about making 99 cents from a Canadian mining company that beats making a dollar from a Chinese/Indian/American/Irish/Whatever company."

Pots of Gold aren't real. Coutries with natural resources, mature finance industries, and self-invested defence contractors, can tax whatever they want based on whatever their alternate sector needs are.

[The Keystone Garter]

http://www.nottingham.ac.uk/credit/documents/papers/08-03.pdf
Best I'll do for now. The 3rd world chart of price elasticities is on pg 24, pdf pg 26.

[Bob Smith]

"http://en.wikipedia.org/wiki/Canada_Deposit_Insurance_Corporation"

Which doesn't cover investments in shares, the returns on which are directly affected by changes in the corporate tax rate (or the myriad of other investment vehicles liked bonds, REITs, mutual fund trusts, etc. that make up the bulk of the universe for Canadian investors). Moreover, Canadian investors who invest in other countries (with much larger capital markets) with deposit insurance programs are typically covered by their deposit insurance programs (e.g. FDIC in the US), so there's nothing about the CDIC that keeps Canadian investors in Canada (There is a general, and irrational, bias for investors to invest in their home country, which is why the focus of my earlier comment was on non-resident investors. Still, for a given level of home country bias, increased corporate income tax in that home country is likely to decrease the level of investment in that country.

"Coutries with natural resources, mature finance industries, and self-invested defense contractors, can tax whatever they want based on whatever their alternate sector needs are."

Which gobbledygook is supported by what real world example? Certainly the paper you cited says absolutely nothing about taxes.

[The Keystone Garter]

The "Foreign Currency Account" wiki claims CDIC said in 2011 most other nations will not honour cdn deposit with insurance, though the USA does. Here is another reason to invest in CAD denominated investments: our currency depreciates less than the USA against Germany/EU. They run deficits and let their currency dive. Being the world reserve currency and often the de facto military of many nations, there is still demand for USD.
The paper mentions sector import price elasticities among African neighbour nations. When the price of some sectors goes up (say via a tax increase), the sector might shrink alot or barely at all. If you raise the price of gold by taxing gold companies more, people will be very slow to substitute other goods or reduce consumption. The paper describes 3rd world economies that don't have mature service sectors like ours. I'd guess universal daycare and beef up university funding (Ireland had free universities) would do more good than maintaining these tax rates, at least for natural resource, finance, and self-invested defense industries. Investors make normative judgements; in 36 years, with all the technologies coming on board, investors will be 100% SRI. We are on our way there, despite what Bell and their oil sands corporate board member ad, and despite what Quebecor and their exec married to Danielle Smith ad.

[The Keystone Garter]

The USA is far from universal healthcare; will require somewhere between GD and 2008 level economic event to get there. In the late 20s and 30s. there was debate whether or not to trade with Germany. UK wanted to and did. France did not want anyone to. Most of the world traded with Germany, and we got the Holocaust and the Cold War in the European Theatre as a result. The same type of reasoning suggests finance, natural resources and self-invested defence industries should be taxed more. That is most of our corporate economy/profits.

[The Keystone Garter]

Japan is paying 120% to self-construct parts of the F-35. Same for our ships in Halifax. I'd rather just give them the extra $2B for quantum computers in Dalhousie and Columbia's fake CO2 sequester trees. The specialty fuels product would be well positioned in their oil storage capacity existing, though the goal is to get the CO2 water sequestered somehow. The natural resource tax I'd index to healthcare wait-times, and the banks I'd impose angel and venture cap investments for tech across thw country, and have the central bank ratchet this down when dangerous, and up when getting good technology. Neocapitalism was a strategy to fight Stalin/USSR.

[J. Hohn]

I don't think I follow Keystone's comment on why finance, natural resources and defence industries should be taxed more.

If Canada has a comparative or absolute advantage in natural resources (which I think could be demonstrated with many trading partners), then it seems to me that those industries would be the LAST things you would tax. Taxing them has the effect of reducing that advantage, and likely total output.

Consider the two extremes of childhood aptitude. Children who struggle most heavily often get extra resources to help them achieve. But children who are gifted often get-- extra resources to maximize that potential. These reflect philosophies at odds with each other. Why would both the highest and lowest achievers command access to extra resources? Which is the better investment?

Should my young daughter struggling to learn the violin get into Julliard because she would benefit greatly from it? Or should the next Itzhak Perlman instead be admitted because of the likelihood of greatness?

It seems to me that most pols believe that a nation's strongest businesses should be taxed to subsidize the weaker ones. But I think that it's overall more effective to maximize your strength than to minimize your weakness.

Thus, let the strongest areas of your national economy flourish with neither impediment nor subsidy and those weaker industries will be allocated by the market to more efficient producers.

[Anthony]

If an increase in corporate income taxes produces less output, then a corresponding cut should produce more output--or jurisdictions with asymmetrical corporate tax rates should have measurably different output levels. But the US, which has comparatively high corporate taxes, has not--the recession aside--had output problems due to taxes; but Canada, with its comparatively low taxes, has not seen the kind of reinvestment that your analysis purports to show would happen.

[The Keystone Garter]

I read a cdn arts book written by a socialist kind of like Frasier Crane who actually turned me off arts funding a bit. The one good ecoonmics sentence was that arts reduces prison population reoffences, but nothing other than the one sentnece. Lots of good ideas of technology and arts intersections but still chose bad arts. He mentioned that snow runner movie and the Life of Pi about ten times each.
J.Hohn, if you lower corporate taxes on natural resources, it won't increase the number of plants that decomposed on Canada 300M yrs ago, nor will it induce a meteor shower of iron meteorites, over Canada. However, if you do increase taxes on natural resources, you can then lower texes on companies like IMRIS; they just moved to MN from MB. You could use their technology to screen out crazy people like R.Klein and R.Reagan from ever have gotten into power, since the media ignores dementia in Prez debates (terminal illness in ours). You could really increase fMRI technology by researching a hotter superconductor that doesn't require expensive refrigerants to function, but like T2 alluded, that would require increasing odds of things like AI. Unless we develop WMD sensors and good gvmt. J.Hohn, your argument applies for manufacturing industries that use natural resources, or perhaps natural resources like wind turbines and drone peat afforestation that have room to be scaled. I don't see IMRIS in AB hosptials; taxes not high enough.

[The Keystone Garter]

...okay, two places AB has IMRIS...I suggest we raise corporate taxes and/or the GST, on the contingency the money be put into health care and health research. There is lots of room for play here. Old Neocons want better healthcare and my generation wants better R+D. It is a tradeoff. Pension income will go down with lower bank dividends, but they are better off with a shorter wait list. It is risky to assume Halifax will attract foreign ship biz. There aren't too many countries with as strong a finance industry as ours (some northern Europe, some India, ND, Australia). The USA is unwilling to pay taxes, so I trust their FDIC less than ours. It isn't macro I'm attacking. It is the 3 or 4 variables macro is using. These need to be changed. Whether or not bankers and petro and media fortunes enjoy 2.5% inflation rates isn't important anymore. Good gvmt is important. Education/behaviour is important. Preventing WMDs (including AGW) is important. Waiting for the CIA to do everything might not work. The are new indicators that can be used by central bankers and new investments that can bring them about. The investors will likely be public and the revenues will have to come from tax rises. Sweden has adult learning courses as part of their culture. It sounds like the Scottish Enlightenment. If you put your chequing account there, no objection from me.

[Bob Smith]

Anthony:

"If an increase in corporate income taxes produces less output, then a corresponding cut should produce more output--or jurisdictions with asymmetrical corporate tax rates should have measurably different output levels. But the US, which has comparatively high corporate taxes, has not--the recession aside--had output problems due to taxes; but Canada, with its comparatively low taxes, has not seen the kind of reinvestment that your analysis purports to show would happen."

First, keep in mind that comparing the US with Canada is comparing apples and oranges in the tax realm. Because the US is a large open economy, it can get away with high corporate tax rates, because it's big enough to be able to shift the global cost of capital. So part of the cost of the US corporate income tax can be shifted to global owners of capital. A small open economy, like Canada, can't do that. The cost of the Canadian corporate income tax either has to be reflected in a reduced domestic capital stock or borne by other domestic factors (I'll come back to this) since it can't be shifted to global capital owners.

Second, keep in mind that tax rates should affect the capital stock, not (in the long run) the growth rate of the capital stock. So countries with different levels of corporate income taxes may grow at the same rates, but from different levels.

Third, what's the basis for the proposition that Canada hasn't seen significant reinvestment? In fact, the same national balance sheets that purport to show Canadian corporations hoarding "dead money" (in fact, much of that shift entails a shift from accounts receivables to cash, as corporations responded to the recession by tightening up credit) also show significant investment in new capital assets. I can tell you that Canada has been a magnet for foreign investment in recent years (which is reflected in the value of the dollar).

Fourth, to come back to a point I raise earlier, to the extent that the long-term cost of the corporate income tax is borne by workers, then you could be right that corporate taxes won't affect investment in the long run (i.e., tax increases/cuts lead to lower/higher wages for workers, so the after-tax return on capital and the capital stock will remain the same). Mind you, there could still be an impact on output, to the extent that changing wage rates lower the supply of labour (although that tends to be less elastic than the supply of capital, so the impact should be smaller). That being said, in that case, corporate income tax cuts would be expected to show up in higher wages (actually, sort of like this: http://www2.macleans.ca/2013/09/10/i-bet-you-didnt-know-canadian-wages-increased-during-the-recession/. However, if that's right (and its perfectly possible), query why political parties that purport to support "working Canadians" but oppose new taxes on said "working Canadians" (hello NDP, I'm looking at you) support a tax that is ultimately borne by working Canadians.