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Jason Kenney’s tax plan full of holes

Summary:
Jason Kenney has proposed that he will revive the Alberta economy and create jobs by cutting corporate taxes from 12% to 8%. The thinking goes that profitable businesses already located in Alberta will take their larger tax returns and make capital investments or hire more workers. This also assumes that businesses in other provinces will decide to move their operations to a lower tax jurisdiction, increasing the tax and employment base for the province. In practice, cutting tax rates for profitable corporations doesn’t create jobs. It didn’t work for the BC Liberals when they tried it. And recent experience at the federal level showed that it only made it more likely for corporations to sit on ‘dead money’, as former Bank of Canada Governor Mark Carney put it. Bigger tax returns

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Jason Kenney has proposed that he will revive the Alberta economy and create jobs by cutting corporate taxes from 12% to 8%. The thinking goes that profitable businesses already located in Alberta will take their larger tax returns and make capital investments or hire more workers. This also assumes that businesses in other provinces will decide to move their operations to a lower tax jurisdiction, increasing the tax and employment base for the province.

In practice, cutting tax rates for profitable corporations doesn’t create jobs. It didn’t work for the BC Liberals when they tried it. And recent experience at the federal level showed that it only made it more likely for corporations to sit on ‘dead money’, as former Bank of Canada Governor Mark Carney put it. Bigger tax returns from rate cuts can be, and often are, used to buy back shares to boost share prices or pay bonuses to executives, which have limited benefit beyond the pocketbooks of those who are already wealthy.

Like most tax cuts, this policy would only benefit those businesses who made enough money to be paying taxes in the first place, and arguably aren’t most in need of help funding new investments. The timing of a tax rate cut also blunts the benefits, as it disproportionately benefits those who have made investments in the past, rather than only rewarding new investments.

As for attracting out-of-province relocation, if Alberta’s existing overall tax advantage and competitive real estate markets haven’t prompted significant movement from other jurisdictions, it’s hard to see how this policy will make much of a difference. Even if it did encourage businesses to move, it’s a zero-sum game that steals from neighbours and sets up the expectation that we need to bribe businesses to set up shop. That’s an unsustainable foundation for long term economic growth.

Another difficult truth is that investing in machinery and equipment doesn’t necessarily create jobs. We need look no further than oil sands investments in self-driving trucks to see how corporate investment doesn’t always trickle down to more or better jobs for workers.

The success and impact of such a policy can’t be viewed in isolation, either. Many economists who support corporate tax cuts will tell you that they prefer a more ‘efficient’ form of taxation, such as a broad based sales tax. That’s not what’s on offer here, so we have to look at what Kenney might cut when the predicted jobs never arrive, and how that would impact the Alberta economy. This is especially true if he plans to follow through with promised cuts to education, the foundation for long term prosperity of any economy.

As government expenditures go, a corporate tax rate cut has the lowest bang for the buck in creating jobs and growing the economy. If we really want to encourage more productive investment, a more targeted approach could be used, such as the Alberta Investor Tax Credit (AITC). Or the provincial government could allow businesses to write off the cost of investments in capital faster, like the federal accelerated Capital Cost Allowance (CCA) introduced under Stephen Harper and extended by Justin Trudeau. But overall corporations and holders of capital need to pay higher taxes, not lower. It’s important to remember that decisions around corporate investment are guided by a number of factors, but most significant among them is ademand, not corporate tax rates.

Trickle-down economic policy is one of those zombie economic myths that will always find strong support among those who stand to benefit from it.

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Angella MacEwen
Economist for @CanadianLabour, @Broadbent Fellow, @Relentless_econ webmistress.

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