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Do Corporate Tax Cuts Create Jobs?

Federal elections are usually less interesting from a workplace law perspective than provincial elections for the simple fact that 90% of workers are governed by provincial law in Canada. That makes workplace law a less important factor in political debates at the Federal level. But occasionally employment-related issues rise to the service in Federal campaigns. This year, that issue relates to the competing claims of politicians about the benefits and harms of corporate tax cuts on employment levels. This debate demonstrates yet again how economics is used and misused by politicians in support of political platforms, a theme I have discussed over and over again over the years.

Canada’s major newspapers have weighed in on the corporate tax debate in recent days:

Here is a Toronto Star piece.
Here is the National Post piece.
And here is a Globe and Mail piece, and another Globe column by Jeffrey Simpson.

If anything is clear from these stories, it is that there is considerable doubt among economists that corporate tax cuts create jobs or even cause employers to invest more in their Canadian operations.  Jeffrey Simpson of the Globe notes that, according to the OECD (hardly a left-wing bastion), there is no discernible  link between corporate tax rates and unemployment levels in the advanced economic countries.

So why do the Conservatives keep telling everyone that the Canadian economy will crumble unless corporations are given even more of break on taxes?

The Conservatives are promising to cut corporate tax rates even lower than the current rate of 16.5%, which is way down from 28% in 1990. The Conservatives insist that there is a direct link between a corporate tax cut and the number of jobs created, even though unlike the Liberals, they are not interested in attaching the tax cuts to actual job creation. In other words, under the Tory plan, corporations get the tax cuts even if they substantially reduce Canadian employment levels. “We will not raise taxes on growth”, said the Tory Finance Minister when asked about the benefit of continuing to cut corporate taxes year after year. Meanwhile, both the NDP and the Liberals have promised to stop the corporate tax cuts and use the increased revenues to pay for more services. Neither party accepts the Tory claims that tax cuts = job growth.

So, do corporate tax cuts increase employment?

The Tories’ claim that they do is based on the basic assumption that tax cuts give employers more cash, which will translate into more hiring. Does this make sense to you? This could happen.    If employers need more employees, but they are unable to hire more due to a lack the cash, then a tax cut could enable those hirings. Of course, many employers don’t hire more people because they don’t need more people. They prefer to have as few employees as possible to perform the work needed, so that there is more money for profits, executive pay, and shareholders. So there is no reason whatsoever to believe that tax cuts will cause employers to hire more people. There are a myriad of other things employers might do with the extra money other than hire more workers, and no reason to believe hiring is even high on that list.  The odds of a tax cut leading an employer to hire more Canadian workers is no greater than, and probably less than, the odds of that employer using the extra money to add to savings, pay higher executive bonuses, or buy a new machine for their factory in Texas or Mexico.  Moreover, there are myriad factors that influence whether employers hire more workers that are completely unrelated to tax rates, so that it is virtually impossible to “prove” a linkage between tax cuts and hiring levels.

Its possible that if Canada lowered its tax rates to almost nothing, that some companies might decide to build new factories here.  But good luck proving that tax cuts are driving all sorts of businesses to flock to Canada.  If Canada’s tax rates were WAY higher than other Western economically advanced countries’, then the tax rate could certainly be a factor in where a company invests.  But Canada is already extremely competitive in terms of international corporate tax rates, so we are only talking about making it marginally lower.  Canada already offers a significant benefit to employers through our publicly funded health care system (paid for by taxes, by the way).  In other countries employers burden health care costs themselves.  And there will always be countries with lower taxes and lower wage workers than Canada for businesses that make investment decisions based on costs.  In other words, the Conservative argument that corporate tax cuts will lead to more Canadian jobs is an argument based on faith and hope, not science or even sound economics.

The two studies referred to in the newspaper clippings suggest that in fact employers do not use money saved in tax cuts to either hire new workers or invest in new machinery or equipment. Instead, the money appears to go into savings, which do not benefit you or I at all. We know also that income inequality and poverty in Canada have been growing at alarming rates (according to the OECD) over the same period that corporate tax rates have been falling. Tax cuts are not free–we all pay for them in cuts to public services, which effects our quality of life.

So, what lesson for my students? As always, the lesson is the same: Doubt any economic argument used to justify employment-related policies. The Tory assertion that corporate tax cuts “create jobs in Canada” or “improve productivity” is a not a fact, it is an assertion only, and a highly dubious one at that when the “evidence” is reviewed.

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6 Responses to Do Corporate Tax Cuts Create Jobs?

  1. Ryan Reply

    April 7, 2011 at 3:48 pm

    Two things. First, I think the stronger argument for tax cuts = more jobs is not that existing employers will hire more employees, but rather that new employers will come to Canada, and in doing so will hire people. In other words, it’s not about growing existing industries but rather attracting new ones.

    That said, our corporate tax rates are already ridiculously low (at least compared to other English-speaking first-world countries). Because of health care, education levels, and other perks, setting up shop in Canada is already a very attractive proposition. On this basis I don’t think additional corporate tax cuts are needed.

    Second, even if new jobs are created, I think politicians are doing the public a massive disservice by glossing over the quality of jobs allegedly created. Part-time/temporary/contract work = bad bad bad bad bad. So not only should corporate tax cuts come with job-creation strings attached, those strings should require the jobs to be full-time/salaried/with benefits.

    • Doorey Reply

      April 7, 2011 at 4:35 pm

      Thanks Ryan. What is the quality of evidence that proves that tax cuts have caused a mass influx of corporations to come to Canada and hire Canadian workers?

  2. Ryan Reply

    April 8, 2011 at 3:08 am

    I’m just speaking in the abstract about corporate tax rates being a big part of the cost of doing business – naturally it’d affect an international megafirm’s decision to set up shop somewhere. That said, I think Canada present exceptional bang for the buck, so I question whether further corporate tax cuts are necessary. Seems like we’re just being heavily sold on something with an illusory return (think Reagonomics…). Sure, companies would always like to have lower taxes, but they also like educated english-speaking workers in a familiar and stable regulatory environment. A lot of something is better than none of anything.

  3. Angela Browne Reply

    April 9, 2011 at 2:33 am

    I would argue that taxes aren’t levied until after the corporation pays its bills, including payroll. Taxes are placed on profits. In my business training, it was more important for a business to generate new revenue streams to create new jobs, as opposed to creating profits on the existing revenue streams in places. After gross profits are assessed, there appears to be no requirement on the part of this government to do anything with it, and as stated in your article and referenced by many economists, this money will never be seen by you or me.

    As for attracting new companies, that argument has yet to be proven as well. If that were true, every corporation would be headed for states like California that charge zero corporate tax, but we know how badly their economy is hurting … job losses, foreclosures, poverty. As our corporate taxes have fallen, I have seen more and more companies actually flee Canada to go elsewhere, not because of taxes, but because the labour is cheaper – we Canadians are a tad unwilling to work for $2 an hour or similar low wages that right to work states, Mexico and some Latin American countries might have.

  4. Doug Reply

    April 10, 2011 at 1:17 pm

    I think I would like to see more than assertions that tax cuts draw companies into the country. Is there any hard evidence of this?

    In my own experience, there are far more important issues than merely tax rate.
    Quality, quantity, and cost of labor force can be far more important.
    Quality, quantity, and cost of related goods and services.

    More often than not, the location of a person or ecology of local businesses is the dominant factor in where a business will form. Taxes are rarely the concern.

    I also know of no companies really being successful at ‘moving’, so as Angela Browne says, its really about generating new revenue streams. I fail to see any linkage between thinking up new product lines and taxes. Perhaps someone could enlighten me.

    GE recently moved its Oil and Gas R&D from Ohio to Texas, citing that they could find nearly 1000 times as many suitable workers compared to Ohio.

  5. Dennis Buchanan Reply

    April 12, 2011 at 11:06 pm

    Corporate taxes *could* stifle economic growth, taken to certain levels. One could pretty much take that on abstract logic alone. What’s far less clear is the overall effect of a moderate tax, at a competitive level on the international stage. Because we are talking about, in effect, taxes on profits, taxes don’t really hurt companies struggling to stay afloat in any direct sense.

    A corporate tax hike may affect (slow?) companies that are growing, *if* one assumes that the additional profit being taxed away would be put into growth and new jobs. I don’t think that this is at all a safe assumption, and in fact with growing income inequality it seems a rather dubious one.

    Given a level of taxation that stifles economic growth, there is a real logic to the proposition that lower taxes will stimulate growth and firm up long-term government revenues. That proposition has been taken by U.S. Republicans and turned into a myth on a near-religious level that lower taxes ALWAYS improve government revenues. Obviously false.

    As for the notion that tax cuts draw companies or encourage new start-up businesses…I agree with Doug: Other market factors are *far* more important than minor differences in tax rates.

    Perhaps more importantly…assume for a moment that this argument were true, and you’ll find the makings of a race to the bottom: Every jurisdiction trying to undercut the next jurisdictions taxes, because of the perceived potential for losing businesses. I might be reluctant to get left behind in such a race, but I’d definitely be loathe to start one.

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