OTTAWA—Corporate income tax (CIT) cuts have not only failed to lead to faster growth, there is evidence to suggest that CIT rate reductions contributed to slower growth, says a study released today by the Canadian Centre for Policy Alternatives (CCPA).
The study, by Unifor economist and CCPA research associate Jordan Brennan, examines the relationship between the Canadian CIT regime and various dimensions of growth and finds there is no empirical or statistically significant relationship between corporate tax cuts and growth.
“Corporate income tax cuts could go down as one of the great Canadian public policy blunders of recent times,” says Brennan. “The problem is the facts stubbornly refuse to support the notion that corporate tax cuts accelerate growth.”
According to the study, the level of business investment since 1980 has oscillated around a historic low, despite several rounds of cuts to corporate income taxes. Employment growth has been anemic among large firms and the business sector. And GDP per capita has grown at its slowest rate since the Depression-laden 1930s.
“In short, corporate tax reductions happened alongside under-investment, a job crisis, and deep stagnation,” says Brennan. “Far from spawning higher levels of business investment and GDP growth, corporate income tax reform has indirectly fostered slower growth.”
The study builds an argument for why a moderate degree of stagnation is desirable from a business standpoint. The hoarding of corporate cash, which is generally recognized as having a depressing effect on growth, is closely associated with the increased corporate and national income share of large firms.
“By reducing corporate income tax rates, Canadian governments contributed to the increased income position of large firms,” Brennan says. “Instead of investing their increased earnings into growth-expanding industrial projects, Canada’s corporate sector—especially its largest firms—has stockpiled cash. This ‘dead money’ is one ingredient in the heightened stagnation of recent times.”
Do Corporate Income Tax Rate Reductions Accelerate Growth? is available to download on the CCPA website.
For more information contact Kerri-Anne Finn, CCPA Senior Communications Officer, at 613-563-1341 x306.