Jack Mintz Tax Myths are Myths

Posted by StickyFeet on April 26, 2011 · Leave a Comment

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The highly respected economist Jack Mintz, University of Calgary, writes a piece in the National Post today “The Campaign’s Top Corporate Tax Myths” in reference to the ongoing corporate tax debate in Canada’s Election 41. I have to take issue with Mr. Mintz’s assertions, at least partially.

The Canada election 41 narrative includes an ongoing debate how whether and how much increases or decreases in the federal corporate income tax rate would decrease or increase federal government tax receipts. Given Mr. Mintz’s stature, I have a feeling the media will pick up on his article and, as they have been wont to do, accept these assertions as solid, without some independent research and checking. And in my opinion there is plenty of research out there to question some aspects of Mr. Mintz’s mythbusting.

The simple truth of the matter is that neither economics or tax policy are sciences; they remain an art. Economists who are well-trained can run all the statistical regressions they want until they are blue in the face, but in the real world economic and business decision-making are significantly more complex than any economic model can easily capture. Just look at the GDP or federal deficit predictions going into and coming out of the recession – the models were behind the real economy. Just last week the finance department reduced is previous projection of the deficit for this year.

So with that, let me raise some concerns with Mr. Mintz’s mythbusting:

Myth 1: Mr. Mintz asserts that corporate tax cuts increase investment. I agree, in general. But, he goes on to assert that increasing the federal corporate tax from 3% from 15% to 18% would decrease the capital stock by $50 billion over the next seven years, based on a study done by Mike Parsons for the years 200-2005. First, the federal corporate income tax is at 16.5% now, and is scheduled to decrease to 15% next year, so it’s not a 3% increase (and companies had to expect that potentially the decrease would be put on pause until the feds eliminated the deficit, so they may not have factored it into their planning – I know that I haven’t done so for my clients).

Second the study by Mike Parsons for a 5 year period is not meaningful – it’s far too short a period and it involves only this one instance of corporate income tax changes, so I wouldn’t put significant credence into this study – I would want to look at multiple periods, multiple instances of tax changes and across multiple taxing jurisdictions and at various levels of changes in absolute and relative terms, and starting points).

Third, lowering corporate income taxes below personal income tax rates – as is the case for Canada now – causes some unincorporated businesses to incorporate, so this change needs to be considered in the effect when looking at the change in the capital base as a result of changes in the corporate income tax rate. Here’s some work done on this topic in Europe at Erasmus University Rotterdam and Solvay Business School. Basically, what we’re saying here is you’re just having some income move from one taxable bucket to another in the pursuit of lower tax rates.

Myth 2 – Mr. Mintz asserts that corporate taxes on large companies are paid not by the rich and powerful but by employees in the form of lower wages and customers in the form of higher prices.

I’ve got several issues with this assertion. Starting with the second part about increases in taxes being filtered through to customers in the form of higher prices. In theory, this is correct in a land of inelastic supply. But in the age of intense competition from both domestic and international competitors – thanks to “free trade” – it’s doubtful that much of any corporate tax increase is going to filter through into higher prices. If you don’t buy this argument, then you are saying, at least to some degree, that free trade has not been very beneficial, which calls into question another tenet of economic theory.

As for whether corporate income tax increases result in lower employee wages, well I have to question that as well. Let’s look at it from the perspective of corporate income tax decreases: is there any evidence that the long term decrease in corporate income taxes has filtered through and provided higher wages to average employees? From a practical standpoint, there are a few mouths in line who are going to get their hands on the tax cut cash ahead of employees, not least of which will be management (see the post “How Corporate Tax Cuts Really Work“), who will reward themselves with higher pay and more stock options. Hasn’t that pretty much been the trend? In any case, despite decreasing corporate taxes over decades, the average employee’s wages have been stagnant for thirty years. Thirty years? Yes. Of course, this fact doesn’t get much play in our 24/7 news cycles, but it’s true. See: ”The Peasants Are Storming The Gate: Let Them Eat Cake?” (This piece is focussed on the US, but the Canadian trend is similar). The article looks at data going back more than thirty years to demonstrate that the vast majority of increase in GDP due to productivity has gone to the very wealthy, the top 10%, who have seen their incomes increase by an order of magnitude.

Myth 3 – Mr. Mintz asserts that an increase in corporate income taxes to 18% won’t raise an additional $6 billion in revenue. May be, maybe not. But given what I’ve said above, I don’t think this assertion can be made so easily. I would also point out that Jim Stanford, Economist for the Canadian Autoworkers, asserts differently, so maybe this falls in between these two well regarded economists.

Myth 4 – I agree with Mr. Mintz, and any way this was of little consequence.

To summarize, I don’t wholeheartedly disagree with Mr. Mintz’s assertions, but I don’t think they should be accepted as gospel. Too often, we and the media accept as fact economic assertions that fly out from right leaning economists, while discounting those of the left, and also give extraordinary credence to economic assertions by business lobby’s, right wing think tanks and large companies. They don’t have all the answers, but they frequently do have conflicts of interest (although I’m not making this claim about Mr. Mintz).

There’s a couple final things to consider. Frequently the types of economists and organizations named above seem to do narrow, static analyses to come up with self-serving or simplistic economic assertions. We really have to learn that the real world is much more complicated. It’s nice to have really low taxes. But the thing is, after a decade of tax reductions in Canada, we’re actually not that highly taxed compared to peer countries. In fact, our federal government is smaller than the US federal government. Did you know that? And that’s even eliminating the effects of the financial crisis, which the US suffered from more. Now, I also realize, being in business myself, it’s very nice to have low corporate taxes, maybe zero, but we also have to fund governments so they can build all the infrastructure that companies need to be competitive in today’s world – hard and soft infrastructure: roads, schools, bridges, and well educated employees. If you lower taxes to the point where you’re skimping on this stuff, maybe even drawing down on this capital, you’re not going to be an attractive destination place for business in the future, at least not for the types of jobs Canadians want.

Finally, let’s not forget that we’ve just been through the single biggest financial crisis since the great depression. The beneficiaries of the prior boom were the wealthy, while those who have suffered most are the lower and middle classes, while the wealthy have already recovered any losses they may have suffered. So out of some justice, we should be seeking to build our social program base, not “starving the beast” of government, which takes its toll on the bottom 80% of citizens. I don’t think Mr. Mintz was in any way advocating such – I think he was just helping to clarify the tax debate (which needs to be done).

If you read this, please consider tweeting it to media. I’m fairly certain Mr. Mintz’s column in the National Post today is going to get a lot of play (at least between the overzealous coverage of the Royal wedding – Good Grief!).