By Brian Lee Crowley
In today’s National Post, Liberal Finance critic Scott Brison makes his case for why this is the wrong time for carrying through on the corporate tax cuts that have been the policy of every federal finance minister since Paul Martin.
Brison is certainly correct that circumstances now are different since those that prevailed when the decision was made to get the federal rate down to 15% by next year. But that doesn’t mean that the policy was only intended for good times, and therefore that the recession and its aftermath should cause us to abandon a policy intended to bolster Canada’s economy in the long run.
On the contrary, I think that there is a strong case to be made that continuation of the planned cuts is part of a thoughtful and measured response to our changed circumstances.
Brison makes much of the fact that massive infrastructure spending during the recession produced more in the way of jobs than corporate tax cuts. No doubt in those special circumstances he is correct, but no one seriously believes that those circumstances, where the private sector was reeling from the near collapse of the financial system, is any guide for the future. If Mr Brison seriously believed this, he would not stop at reversing this year’s corporate tax cut – if public spending produces 8 times the job creation of corporate tax cuts, why not follow the logic of that through and tax away all corporate profits? On Brison’s argument, the state can spend the money far more effectively….
A crucial part of Brison’s argument hangs on two propositions: first, that Canada has been devastated by the recession and second, that a modest reversal of recent corporate tax cuts would produce more revenue. Both of these propositions, while not at all ridiculous, are quite overdone.
Take the claim that the 2010 deficit is the largest in Canadian history. In cash terms, it may be the largest number ever, but as a share of the economy (the more usual way of measuring the size of the deficit), this deficit is nowhere near the largest. That honour would go to a government of which Brison was strongly supportive: the Mulroney Tories. If you want to see the graphic representation of this, click here and look at the part of the chart showing budget balances over the past 45 years or so. You’ll see the peak was a deficit of 6.6% of GDP in 1985. The deficit in 2009 was a fraction of that, and 2010 looks like coming in well below that again. In fact the deficit in virtually every year of the Mulroney government was higher than in the late unlamented recession.
Not only was our deficit not particularly large in historical terms, our stimulus programme was smaller than that of all the other G7 countries, and our loss of output was similarly lower. We have actually now recovered all of the jobs lost since the trough of the recession. Canada has done very well in both absolute and relative terms – the US will have a deficit this year bigger than Canada’s entire economy….and continues to have an unemployment rate well above ours. While it is hard to be precise when handing out the credit for our strong performance, there are lots of reasons to believe that the budget reforms started under Jean Chrétien and Paul Martin (including the corporate tax cuts) put us on a sound fiscal footing that stood us in good stead during the downturn.
One could make the exact reverse argument of Brison’s: that if we are to wean ourselves off the temporary tax-financed stimulus programme and return to private –sector driven growth, by definition we need to private sector to expand. In fact in today’s StatsCan Daily (February 28th), this broad expectation is made explicit:
“Much of the recovery from the 2009 economic downturn occurred in 2010 due to strong growth on the part of both public (+17.5%) and private (+8.0%) investment. If intentions are realized, increases in 2011 will be led by private investment, which is expected to grow 3.8% to $261.3 billion.”
The private sector has been making its investment plans based on an undertaking about corporate tax rates endorsed by both Liberal and Tory finance ministers since 2000. And since corporations have been sitting on large cash balances while waiting to see how the financial crash would play out (a smart strategy since debt-led investment will be quite expensive given banks’ reluctance to lend), Canada can look forward to large private sector investments if we create attractive conditions to do so. The planned corporate rate cuts are part of that effort.
Brison says that our tax rates are already pretty competitive with the G7, but I don’t think that’s all that helpful here. Our corporate rates are above the OECD average (that’s the club of all industrialized countries), and much of the competition for investment comes from the BRIC countries, the Asian tigers, and so forth. With the exception of Germany I don’t think most of the G7 countries are models of economic vigour today.
Finally, what about Brison’s claim that reversing some part of the planned corporate tax cuts will bring in more revenue. According to a paper we published recently by Jason Clemens, while that may be true in the short run, in the long run corporate tax cuts have also encouraged higher profitability in the Canadian corporate sector. Since it is profitability that is the great driver of corporate tax revenues, lower tax rates, by encouraging investment and patriation of profits, have actually increased the take from the corporate sector in many years. As Clemens points out:
“Federal nominal (non-inflation-adjusted) corporate income tax revenues increased, on average, by almost 10 percent between 2001 and 2006 even though the corporate income tax rate declined from 27 percent (2001) to 21 percent (2006).”
Again, Brison’s arguments are not without merit, and he makes the best possible case for his party’s current policy. Too bad that the policy they abandoned, of declining corporate income tax rates, has the better arguments on its side.