One of the central planks of the Trump platform has been the lowering of corporate taxes as a spur to greater growth. Current plans call for a reduction of corporate taxes from 35 per cent to 15 per cent, making the United States one of the lowest tax regimes in the developed world. In cutting taxes, the thinking goes, the savings will be channeled into more R & D, expanding production facilities and hiring more workers--- all contributing to higher growth rates. In addition, the politics of the tax cuts include the desire to encourage more U.S. multinationals to relocate more facilities and operations onto U.S. soil as well as repatriating untaxed profits sitting in subsidiaries overseas.

The merits of corporate tax cuts have been studied ad nauseam in academic and policy-making circles. Studies in support of the effectiveness of tax cuts argue that taxes are just another factor in  production, like labour and capital, and, as such, any reduction  will contribute to greater output. Other studies argue, from empirical evidence, that corporate taxes have not affected capital expenditures and overall growth meaningfully.

Tax cuts cannot be considered in isolation. On the supply side, there are plenty of other things that shape where companies choose to locate—the quality of workforce, the regulatory regime, and access to low- cost capital, among other factors. On the demand side, companies have to be satisfied that market conditions, competition and existing production capacity favour expansion. Many studies suffer from the assumption of ceteris paribus, i.e. all other things being equal. So many factors go into a corporate decision to expand operations that all other things are not equal.

Canadian Corporate Income Tax Experience

Starting in 1988, Canada reduced the federal corporate income tax to 28 per cent from 26 per cent, along with closing  several tax loop holes and further broadening of the tax base. A further round of corporate in­come tax reforms resulted in the federal rate being reduced to 21 per cent (by 2004) from 28 per cent (in 2000). The main beneficiaries were businesses operating in the service sector, which had been taxed at a higher rate than manufacturing and resource-based firms. The Harper government reduced corporate income tax rates in five steps, to 15 per cent by 2012 from 21 per cent in 2007. Canada now claims one of the lowest corporate tax regimes in the western world.

There has been no positive impact on fixed investment from the significant corporate income tax reductions in Canada since 1980(Chart 1)[1]. The rate of investment as a per cent of GDP for the whole of the post war period up to 1980 was 12.8 per cent. For the 1980-2013 periods the rate of investment dropped to 10.5 per cent. Since 2013 the rate of business investment has declined even further and the failure to generate greater investment is readily apparent in the low GDP rates of the last three years.

Chart 1 Investment in Fixed Assets in Canada

Canada’s experiment with lowering corporate income taxes is now over. We are amongst the lowest tax rates in  the OECD. Yet investment has not benefitted from the lower rates and em­ployment growth has been anemic in the business sector. In addition, growth in GDP per capita has been the slowest in the post-war era. Policy-makers should not hang their hats on the hook of corporate income tax reduction as a way forward.

[1] Do Corporate Income Tax Rate Reductions Accelerate Growth?

Jordan Brennan, Canadian Centre for Policy Alternatives, Nov 2015