Proof is not in the numbers for Flaherty’s corporate tax cuts

In an article in the Globe and Mail on January 5,  columnist Neil Reynolds argued that the federal Finance Minister’s corporate tax cuts from 19.5% in 2008 to 19.0% in 2009, 18.0% in 2010 and to 16.5% in 2011 “are already paying off”.  However, the facts quoted in the article do not support his claim.

Reynolds states that in the October 2010 Update, corporate income taxes had increased, year-over-year by 3 per cent – not withstanding lower corporate earnings and Mr. Flaherty’s incremental tax cut a year ago. This, according to Mr. Reynolds is proof that the tax cuts are paying off.  The 3-per-cent increase refers to fiscal year 2009-10.  However, the Department of Finance notes in its Annual Financial Report for 2009-2010 that the increase was attributable to exceptional one-time factors.  These one-time factors are estimated at about $6 billion, which would imply an underlining decline of about 17% in corporate income tax revenues in 2009-10. 

Reynolds also states that corporate income tax revenues are running 8% ahead of the government’s expectations for 2010-11.  However, as noted in our previous blogs, there is no direct correlation between monthly corporate income tax collections for the first eight months of the year to the final outcome for the year as a whole, given monthly remittance procedures, which are based on either the corporation’s previous year tax liability or the its estimated tax liability for the current year.  The most important months for corporation income tax collections are December, February and March as corporations make their final tax installments based on their actual tax liabilities.

 In addition, the special one-time factors affecting corporate income tax collections in 2009-10 were only booked in March 2010 and in the end-of-year accounting period, so that they are having no impact on the current monthly results.  The Department of Finance still expects corporate income tax collections to be lower in 2010-11 than in 2009-10 because of the special one-time factors affecting revenues in 2009-10.  Excluding the impact of the one-time factors affecting 2009-10, corporate income tax revenues are forecast to increase by about 17% which is in line with the growth in corporate profits witnessed in the first three quarters of 2010.   

Reynolds notes that corporate income tax revenues were much lower in the early 2000s when tax rates were much higher.  Corporate profits increased significantly in the mid-2000s not because of lower tax rates but due to higher energy prices and profits by financial institutions.

Finally, he notes that corporate income tax rates (federal and provincial) need to be lowered further because the United States is posed to slash its corporate income tax rate from 40% to 25% as recommended in President Obama’s bipartisan commission on fiscal reform.  That commission recommended a package of spending cuts and realignment of the tax system to address the U.S. deficit problem over the long run.  Most commentators doubt that many of the commission’s recommendations will be adopted.

A competitive corporate income tax system is a perquisite for strong and sustained economic growth.   However, his arguments that lower corporate income tax rates pay for themselves is not supported by his arguments.

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