One of the truisms of neo-classical economics is that tax cuts for those already wealthy and powerful will “trickle down” to the middle and lower class. In other words, making rich people richer will eventually make everyone richer.
One of the most popular versions of this theory is the corporate income tax cut, which supposedly induces corporations to invest in machinery and its labour force, and thereby boost its productivity for the benefit of all. Admonitions abound that “[b]usiness taxes have a substantial impact on economic growth and productivity in terms of foregone revenue”. Thus, in 2000, the C.D. Howe Institute grudgingly approved the federal Liberal plans to decrease the “general federal corporate income tax from 28 percent to 21 percent over five years”, but noted that it wasn’t enough: “[T]he reforms are neither significant enough nor are they to be implemented quickly enough to make Canada’s business tax system truly competitive with the systems in many other industrialized countries or to create significantly better conditions for investment in Canada.”
The general rate is now 19%, with calls aplenty for further reductions of both federal and provincial corporate taxes. The problem, however, is that 10 years later and with the federal corporate tax rate cut by a third, Canadian productivity hasn’t improved. According to a June 3, 2010, report from that paragon of Bay Street, TD Bank,
the alarming reality is that labour productivity growth in Canada’s business sector has been in structural decline since the 1970s. Even more concerning is that since 2000, labour productivity growth has slowed to a crawl. The scope of this trend has not been mirrored by other developed countries, and it is taking a toll on Canada’s international economic clout. Between 1990 and 2008, Canada’s GDP per capita slipped from 5th to 11th among OECD countries.
The report clearly lays the blame on Canadian companies, which are “failing to innovate and find better ways to employ their existing resources”. The situation puzzles the report’s authors, since “taxation policy has become dramatically more favourable towards capital investment”. In the end, the TD report admits it doesn’t have all the answers. Indeed, the “answers to many of the questions surrounding Canada’s productivity woes are awaiting discovery, but an aggressive and substantial research effort will be necessary to uncover them”.
So the self-serving truism isn’t true at all. Corporate income tax cuts may serve to amplify corporate profits and shareholder dividends, boost mergers and acquisitions, and increase CEO bonuses. But they don’t improve productivity and competition, and they don’t improve employment in the “goods-producing sectors” that should benefit most from productive investments.
Of course, what corporate tax cuts do is reduce the contributions of the business sector to government coffers, and increase the revenue burden on working-class and middle-class citizens. And this is the core of the neo-liberal agenda: attack progressive taxation, and redistribute the burden of taxation from the wealthy to the middle and lower classes. If you’re good at it, you’ll convince the hoi polloi that it’s good for them – wealth will trickle down, after all – or you get them to willingly accept a much smaller government – I’m happier accepting less because that’s what makes the wealthy happy.
One of the most blatant examples of that is right here in BC. In the September update for the 2009 budget, the provincial Liberals bragged about the following:
In 2008, the small business corporate income tax rate was reduced from 4.5 per cent to 2.5 per cent — a reduction of 44 per cent. The government intends to reduce the rate to zero by April 1, 2012. B.C.’s general corporate income tax rate has been reduced from 16.5 per cent to 11 per cent, with further reductions to 10.5 per cent planned for 2010 and to 10 per cent in 2011.
So how do we pay for this reduction in revenue? One way is to institute an HST tax that eliminates “retail sales taxes on business inputs and capital goods such as machinery and equipment, and reduce[s] the rate of taxation on new investment”. Doing this redistributes the sales tax burden from the business sector to the consumer sector. (For more, see my September 2nd discussion of BC’s HST.) Another way is to increase user-pay fees… even more. Instead of spreading the costs of certain social services across the tax-base and across time, the user is expected to pay more and more and up-front for specific services. For example, in another document from the same budget update, we see an inevitable but rather shocking result – in 2011/2012, the BC government is expecting to receive more revenue from post-secondary tuition than from corporate income tax. According to government revenue projections, BC corporate income tax revenue will be $1,038,000,000 while post-secondary education fees will earn the BC government $1,114,000,000 (see p. 144).
Thus, on behalf of benefits that don’t exist, more people will be forced into larger and larger debt loads, or will forego user-pay services – like university – altogether. Politics is about choice, and it’s clear what choice our current provincial government has made.
Edited on: Wednesday, September 29, 2010 7:18 PM