Let's rewind back to 2018. Saudi Arabia joined the 1950s and allowed women to drive, three more Kardashians were brought into this world and President Trump revealed he was afraid of a little rain, probably because he thought it would ruin his makeup. Meanwhile in Canada, Bay Street was losing its mind.
The Trump tax cuts, which dropped the US corporate tax rate down to 21 percent from 35 percent, had just been signed into law at the end of 2017. Here in Canada, the reaction was loud, relentless and occasionally outright dishonest. (No corporation pays 45 percent tax in Canada. Not even close.) Our business elites screeched that Canada needed to reduce its corporate tax rates in the name of "competitiveness." Without this, the implication was that companies would leave the country en masse, resulting in irreparable damage to our economy - high unemployment, big deficits, inability to fund social programs, collapsing loonie. A report from PWC estimated that 4.9 percent of Canadian GDP, or 635 000 jobs, were at risk if we didn't cut our own taxes. It was a truly frightful picture.
And then nothing really happened.
At the time the tax cuts were announced, the unemployment rate in Canada stood at 5.7 percent. Two years later at the end of 2019 the unemployment rate was 5.8 percent, which translates into a loss of perhaps 13000 jobs, which is really a rounding difference. Canada's GDP growth was 2 percent in 2018, 1.7 percent in 2019; not great, but far from the catastrophe that was predicted.
It seems appropriate to revisit this in light of the CD Howe Institute's recent brain-dead suggestion that the Trudeau government should cut corporate taxes but raise the GST back to 7 percent. While in 2018 there wasn't yet actual data on the effect of the US corporate tax cuts, there is now, and the data shows unequivocally what a failure the US tax cuts were. According to an IMF study, 80 percent of the tax windfall was spent on increasing dividends and companies buying back their own stock, while only 20 percent was spent on business investment. This means that the benefits overwhelmingly accrued to shareholders, and since 84 percent of the shares owned by US households are owned by the wealthiest 10 percent of the population, the tax cut turned out to be just another handout to the people that needed it the least. Did it help middle and lower class workers? Of course not; median wage growth was 1 percent in 2019 while wages actually shrank for the bottom 10 percent.
The logic behind corporate tax cuts being needed to boost business investment is so obviously flawed you have to somewhat admire the gall of the people willing to get out and flog this idea. First of all, we already tried it. In 2006 the Harper government slashed the federal corporate tax rate from 22 to today's 15 percent. You would think a big drop like that would have some effect, but you'd be wrong. The level of business investment didn't move at all.
If you factor in the provincial rates, the total tax rate for big business after the Harper cuts is about 25-27 percent, depending on what province a company resides in. But almost no company pays that rate. Between 2011-2016, the largest 102 corporations in Canada paid an effective tax rate of 17.7 percent. The federal rate for small businesses is 9 percent, and adding in the provincial rates gets it to 12-16 percent. Does this seem like it's too high? (Not when you consider that for every dollar in income taxes corporations pay, individuals pay 3.50 dollars.)
Add to this the fact that interest rates have been incredibly low since the financial crisis of 2008. If having to pay less than 20 percent tax while being able to borrow money at rates under 5 percent for more than a decade doesn't spur an increase in business investment, maybe that should tell you the problem is not on the supply side. The real problem is actually insufficient aggregate demand, and corporate tax cuts not only don't solve that problem, they make it worse. We need tax cuts for working people at the lower end of the income range. These kinds of tax cuts would boost demand, which would then spur business investment.
The failure of the Trump tax cuts was roundly predicted by all sorts of US economists at the time, but that message never seemed to make it through the impenetrable fog of groupthink in Toronto. We were subjected to an endless parade of CEOs, fund managers and pundits braying the same false narrative of impending disaster for months on end. I think it's appropriate to name a few of them: David Dodge - former head of the Bank of Canada; John Manley - former finance minister; Dan Kelly - CEO of the CFIB; David Rosenberg - economist; Perrin Beatty- President of the Canadian Chamber of Commerce; Jack Mintz - economist; David McKay - CEO of RBC; Brett Wilson- former judge on the game show Dragon's Den.
If you're holding your breath waiting for a mea culpa from any of these gentlemen, don't hurt yourself. One thing about the times we live in is that people are almost never held accountable for being wrong. The media cycle is shallow and short and it leads to short attention spans. But wrong they were and that shouldn't be forgotten, especially when this dumb idea is being pushed yet again, even in the face of clear and overwhelming evidence.
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