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Big businesses party profits, eat more cake with less investment and jobs: study finds

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Corporate Tax Cuts

A study by the Canadian Labour Congress (CLC) found that major non-financial industry firms were not using the tax breaks to reinvest and create jobs. The report is titled: What did Corporate Tax Cuts Deliver?

The report stated that by the end of January, corporations will have fully paid their share of taxes.

Back in 2000, the general federal corporate income tax rate stood at 28% in 2000.

Under the Liberals, it was cut to 21%, and then cut in stages from 21% to 15% under the Conservatives.

The most recent cut was from 16.5% to 15%, effective January 1, 2012.

As the report points out, each one percentage point cut to the corporate income tax rate costs the federal government about 2$ billion in annual revenues.

The argument by those in favour of tax cuts, is that increased after-tax corporate profits would be re-invested back into company operations, boosting economic growth, productivity, and jobs.

However, the Canadian Labour Congress (CLC) report challenges this assertion. The CLC study (published January 25, 2012) looked at the profits and investments of Canada’s largest companies, those listed on the S&P/TSX composite Index (financial markets), from 2000 –  2010.

And February 1 was declared as the Corporate Tax Freedom Day. This is the day that the Corporations have paid all of their taxes for the year. And in the past,  this Corporate tax freedom day would fall much later in February. With the corporate tax rates cut as they are, the report argues the Corporate Tax Freedom Day could occur in late January in the future if the trend persists.

The CLC study found:

  •  The effective tax rate (taxes actually paid by Canada’s largest companies to the federal and provincial governments as a share of pretax profits) has fallen from one third in the early 2000s (35% in 2000), to between one fifth and one quarter (24% in 2010).
  •  Companies have used after tax profits to boost dividends paid out to their shareholders. Dividends as a percentage of after-tax profits have risen from 30% in 2000 to over 50% in recent years. Companies have also chosen to retain higher after-tax profits as financial assets, as cash, and as longer term assets, not counting investments in capital stock.
  •  The Top-10 Corporate Hoarders have accumulated $30.7 billion in extra short- and long-term assets between 2000 and 2010, since 2000. The leading cash hoarder was Potash Corporation of Saskathewan, which took in over 5$ billion in assets from the period.
  •  The combined federal/provincial statutory rate has fallen from 42.6% in 2000, to 27.8% in 2011 and is expected to fall to just 25% over the next few years. The US in comparison, has a federal corporate tax rate of 35% and state taxes result in a combined rate of about 40%. However, the “effective” corporate tax rate – the actual percentage of profits paid as taxes – is lower than the statutory rate – varying between 20 – 25% of before-tax profits since 2005. The “effective” rate is lower than the statutory rate because not all forms of corporate income are fully included in taxable income, and because corporations can deduct some costs from their taxable income on very generous terms and conditions.
  •  KPMG ranked Canada’s corporate taxes the lowest in the G7 countries. Proponents of ever lower corporate taxes argued that the money corporations saved from lower taxes would be reinvested in real assets such as new factories, new machinery and equipment, and training, thus boosting economic growth and productivity, and helping create more and better jobs; however this, is not what has been happening. Real investment has languished while profitable corporations have been paying out much more in dividends to shareholders and accumulating more financial assets.
  • A lower corporate tax revenue contributes to the deficit, because the federal government has to borrow to finance tax cuts for corporations. And the government is already cutting spending on programs by at least $4 billion per year to pay for the corporate tax cuts.
  • At the same time as corporate tax cuts are being paid out to investors, corporate Canada is also building an enormous pile of mainly financial assets. Canada’s biggest non-financial companies have more than doubled their holders of such assets, from $37 billion in 2000, to $87 billion today. The term financial assets, includes both “Cash and Cash Equivalents” and “Long – Term Investmnets” which the company intends to hold for at least one year. Long term investments consist of financial assets, and do not include investments in capital stock (nor accounts receivable, inventories, or intangible assets).

An important point the report makes is on the energy and minerals sector.

Corporate tax cuts simply divert the benefits of high resource prices from citizens to corporate shareholders (half of whom live outside Canada). The cost is cuts to services or higher taxes for ordinary Canadians

And even Statistics Canada Chief Economist Philip Cross stated,

A couple of billion dollars (of savings from tax cuts) is a drop in the bucket of corporate income…Canada’s natural resources, the price of oil, currency fluctuations and the state of the country’s financial markets have been far more influential on corporate investment decisions than recent tax cuts

David Dodge, former deputy minister of Finance and governor of the Bank of Canada, questioned the need for the 2012 corporate tax cut.

He said,

[T]he final scheduled cut in the corporate tax rate might be foregone (or postponed well past 2013) without losing tax competitiveness as it now seems unlikely that major cuts in the U.S. or European corporate tax rates will take place. These additional revenues later in the decade would help to maintain the federal balance.

A lower corporate tax revenue contributes to the deficit, because the federal government has to borrow to finance tax cuts for corporations. And the government is already cutting spending on programs by at least $4 billion per year to pay for the corporate tax cuts.

The report argues that at the same time as corporate tax cuts are being paid out to investors, corporate Canada is builds an enormous pile of mainly financial assets. Canada’s biggest non-financial companies have more than doubled their holders of such assets, from $37 billion in 2000, to $87 billion today.

The term financial assets, includes both Cash and Cash Equivalents and Long – Term Investments which the company intends to hold for at least one year. Long term investments consist of financial assets, and do not include investments in capital stock (nor accounts receivable, inventories, or intangible assets). Here is a chart breaking this down.

The author of the Canadian Labour Council report argues “giving tax breaks to corporate Canada when times are uncertain leads them to simply shove more money under their collective mattress. That is, unless they haven’t already paid out the savings as dividends.

At the Davos economic forum, Harper himself stated he was disappointed with the lack of innovation in research and development (R&D), even with the generous amounts of money poured. He said,

Broadly speaking, the Canadian business side of the economy is not as innovative as it needs to be.

The Canadian Labour Congress study seems to have found a similar result to that of economist Jim Stanford who, earlier in 2011, also found that businesses were hoarding their profits, and providing less contributions in taxes and employment. A summary of Stanford’s previous study is provided below.

Having their Cake

A study for the Canadian Centre for Policy Alternatives titled: Having Their Cake and Eating It Too showed that corporate tax cuts since the late 1980s have greatly increased corporate cash flow, while real business investment in building, and in machinery and equipment, has actually fallen as a share of the economy.

This study examined historical data on business investment and cash flow from 1961 through 2010. Using econometrical techniques, the study found 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,” wrote Stanford.

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

Stanford argued, “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.”

His study also revealed that Canadian corporations 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 reduced 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.

Full breakdown of tax breaks that is presented below in a timeline format:

1945-1975 Businesses generally reinvested their full cash flow into the Canadian economy. This was almost 100% of corporate share of after-tax corporate cash flow that was reinvested in new fixed non-residential capital investment.

1960s-1970s Aggregate investment spending was high as a share of total Canadian GDP. Total national capital spending accounted for over 20 percent of Canada’s GDP. Due to this, economies tend to grow faster, experience faster productivity growth which leads to rapidly growing incomes when this happens

1981 OECD began to keep a comprehensive database of combined Canadian federal-provincial statutory tax rates.

1985 Since the mid-1980s, therefore, business investment spending declined, but business cash flow increased. The result is a growing gap between cash flow and business investment

1988 Under the Conservative government of Brian Mulroney, the federal statutory tax rate was reduced from 36 percent to 28 percent (not including a 1.1 percent surtax). At the same time, however, numerous tax loopholes which reduced effective business taxes were closed. The net impact on final taxes paid by business was therefore muted. This year marked the implementation of the first round of business tax reforms and reductions. By 2011, business investment had declined by 1 full percentage point of GDP —even though after-tax business cash flow had increased (in part as a direct result of the tax reforms) by 3 to 4 percentage points of GDP. The proportion of after-tax cash flow which Canadian firms re-invest in fixed non-residential capital declined from near 100 percent before the tax reforms, to less than 70 percent today

2001 Prime Minister Jean Chrétien and Finance Minister Paul Martin implemented a further reduction in the statutory tax rate. The effective rate began to decline following these cuts. Since 2001, Canadian corporations received a cumulative total of $745 billion in after-tax cash flow which they did not re-invest into Canadian fixed nonresidential capital projects

2004 Prime Minister Jean Chrétien and Finance Minister Paul Martin implemented a further reduction in the statutory rate to 21% by 2004.

2008 Following the global financial crisis there was a dramatic downturn in investment spending by Canadian businesses resulting in a sharp recession in Canada’s domestic economy. Prime Minister Harper reduced the statutory tax rate to 18%

2009 Business fixed investment spending (considering both structures and machinery & equipment) had declined by 24 percent in real terms from the autumn of 2008 through the end of 2009. That decline was the worst since the Great Depression of the 1930s, and was the steepest decline in spending, experienced in any sector of Canada’s economy during the recession

2011 By 2011 business investment had declined by 1 full percentage point of GDP —even though after-tax business cash flow had increased (in part as a direct result of the tax reforms) by 3 to 4 percentage points of GDP. The proportion of after-tax cash flow which Canadian firms re-invest in fixed non-residential capital has declined from near 100% before the tax reforms in 1988, to less than 70% today. Thus, according to Stanford, the proposed 3-point reduction in corporate tax rates would stimulate only about $600 million of new investment.

Also, the business sector was the only sector in Canada’s economy still spending less in 2011 than in 2008 before the recession started. In contrast, consumer spending and government spending have both increased substantially (partly as a result of pro-active stimulus efforts by policy-makers, including lower interest rates and discretionary fiscal policy). Corporate income taxes also were slated to be reduced another 1.5 percentage point for a 15% tax rate in 2012.

2011 Also in 2011, after-tax corporate cash flows increased but business investment (into new expenditures on fixed non-residential capital in Canada) decreased (2001-2011). This uninvested cash flow now totals $750 billion and the divide between cash flow and business investment continues to grow.

2012 Tax rate is set at 15%

2013 Combined federal-provincial statutory tax rates will have been cut in half by 2013, compared to the early 1980s


To bring home the point even further, according this Statistics Canada chart, total corporate cash reserves of private, non-financial corporations grew from $157 billion in the second quarter of 2001, to $477 billion in the second quarter of 2011.

And in a Globe and Mail article titled Corporate tax cuts don’t spur growth, The Globe revealed that the rate of investment in machinery and equipment had declined in lockstep with falling corporate tax rates over the past decade.


At the end, the author of the Globe article asked,

At a time when Ottawa and many provinces are awash in deficit, should governments invest scarce resources in making life more affordable for families by enhancing social programs or in giving corporations additional tax cuts?

Seems like that’s a question each individual will have to decide upon. Maybe all this would explain Harper’s criticism of the corporate sector at Davos. Thoughts?

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Comments (2)

  1. Pingback: The Banking Empire – Deregulation of Canada’s Financial Industry Pt 3Prudent Press

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