Corporate tax cuts economically ineffective

April 13, 2011

OTTAWA—The Conservatives’ proposed 3-point reduction in corporate tax rates would cost the public purse $6 billion per year, yet only stimulate about $600 million of new business investment annually, says a study released today by the Canadian Centre for Policy Alternatives (CCPA).

The study, by economist Jim Stanford, examines historical data on business investment and cash flow from 1961 through 2010. Using econometric techniques, the study finds no evidence in the historical data that lower taxes have directly stimulated more investment. Moreover, the indirect impact of tax cuts on investment (experienced through corporate cash flow) has become much weaker over time.

“Business fixed capital spending has declined notably as a share of GDP and as a share of corporate cash flow since the early 1980s—despite repeated tax cuts that have reduced the combined federal-provincial corporate tax rate from 50% to just 29.5% in 2010,” says Stanford.

After adjusting for other determinants of investment spending, incremental cash flow has elicited only small amounts of business investment in recent years: about 10 cents in new investment for each dollar in extra cash flow.

“Given this statistical evidence, the federal government would have a far more powerful impact on both public and private investment by investing directly in public infrastructure, rather than providing additional tax reductions for businesses,” Stanford says.

If the federal government spent $6 billion on public infrastructure instead of corporate tax cuts, the total increase in investment would be more than ten times as great as the increase in private investment from tax cuts alone. This includes the new public investment itself ($6 billion), as well as an additional $520 million in private business investment that would be stimulated through the positive spin-off effects of the resulting economic growth.

According to the study, Canadian corporations have received $745 billion in excess, uninvested after-tax cash flow since 2001: cash flow that was not reinvested in real capital projects in Canada. This excess corporate saving reduces expenditure and purchasing power in the Canadian economy. A lack of business investment spending was the major source of Canada’s recent downturn, and the sluggish rebound in business spending is a key reason why Canada’s recovery from the recession has been uncertain, sluggish, and incomplete.

“Corporate Canada has been consistently receiving far more after-tax cash flow than it is reinvesting in Canadian capital spending—to the tune of $745 billion since 2001,” Stanford says. “Supplementing that cash flow through further tax cuts is like pushing on a string. Those tax savings would only add to the large sums of uninvested cash flow Canadian businesses already possess.”


For more information contact Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.