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What did Corporate Tax Cuts Deliver?

Posted: Wednesday, 25 January 2012

Summary

Due to ongoing corporate tax cuts, corporate income taxes make up a falling share of all government revenues. In fact, by the end of January, corporations will have fully paid their share of taxes.

The general federal corporate income tax rate stood at 28% in 2000. It was cut to 21% under the Liberals, 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.

Each one percentage point cut to the corporate income tax rate costs the federal government about $2 billion in annual revenues.

The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs. However, studies have shown that rising corporate after-tax profits have not resulted in increased real investment.

This study looks at the profits and investments of Canada’s largest companies, those listed on the S&P/TSX Composite Index, from 2000 to 2010.

In line with cuts to the statutory federal and provincial tax rate, the effective tax rate (that is, 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 increased 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 study looks at the change in the assets of Canada’s largest non-financial companies. (Financial companies and conglomerates are excluded because they typically hold large financial investments as part of their ongoing business.)

The Top-10 Corporate Hoarders have collectively accumulated $30.7 billion in extra short- and long-term assets between 2000 and 2010, since 2000.  The leading cash hoarder has been Potash Corporation of Saskatchewan, which accumulated over $5 billion in assets over this period.

The Appendix lists Canada’s top Corporate Hoarders.

Cuts to corporate taxes have resulted in a major loss of government revenues, without the anticipated result of higher corporate investment in machinery and equipment, new plants, and other areas of company operations. Instead, we have seen a big increase in dividend payouts and in financial assets.
 

Download the paper.