Corporation tax cuts do not pay and may be harmful to growth

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The Tax Justice Network blog has noted this today:

The Canadian Center for Policy Alternatives has just published a new study entitled Do Corporate Income Tax Rate Reductions Accelerate Growth? It summarises:

“This study examines the relationship between the Canadian corporate income tax (CIT) regime and various dimensions of economic growth. The author finds that CIT cuts have not only failed to lead to faster growth, but there is evidence to suggest that—far from spawning higher levels of business investment and GDP growth—corporate income tax reform has indirectly fostered slower growth.”

The CCPA study contains this striking conclusion:

“If the findings contained in this paper are true, then corporate income tax cuts will go down as one of the great Canadian public policy blunders of recent times.”

In more detail, the study explains:

“By plotting the empirical history of, and statistical association between, three CIT rates—the effective federal rate, the combined statutory rate, and the weighted average effective rate on the top 60 Canadian-based firms—and five growth variables—business investment in fixed assets, private sector employment, GDP per capita, labour compensation, and productivity—the paper concludes there is no empirical or statistically significant relationship between CIT regime and growth.

Of the 52 tests of association, 38 (or three-quarters) are not statistically significant. In the roughly one-quarter of cases where there is a statistically significant result, the direction of the effect is more often positive than negative—the opposite of what neoclassical economic theory predicts.”

As TJN notes:

Neoclassical theory says that corporate tax cuts should feed through into more business investment, and hence higher growth. In practice, however, they have been feeding through into corporate cash hoarding: what the then Bank of Canada Governor Mark Carney in 2012 called “dead money.”

There is much more on this on the TJN blog; for those with interest in this I recommend continuing over there.