After months of reducing expectations, Finance Minister Bill Morneau provided corporations with surprisingly large tax breaks in his mini-budget,worth $14.4 billion over the next five years.
The tax breaks—which allow businesses to write off the cost of capital investments more rapidly—were supposedly introduced to increase the attractiveness of investing in Canada after President Trump slashed tax rates for U.S. businesses and top incomes earlier this year. They were well-targeted for short-term political reasons: to shore up business support for the Liberals less than a year before the next election. This “deficit-financing of the corporate sector” received an enthusiastic thumbs-up from business lobby groups, including the Business Council of Canadaand the Canadian Federation of Independent Business (which also called for further tax cuts and for the federal government to balance its budget without any sense of irony).
But a bigger question is whether another $14 billion in tax breaks for business will actually work in economic terms and boost business investment in Canada—and to “grow the middle class and those working hard to join it”?
Steep cuts in corporate tax rates have failed to boost rates of business investment in Canada and neither have even steeper cuts in the broader set of tax rates that apply to business investment decisions.
Over the past two decades, Canada’s Marginal Effective Tax Rate (METR) on new investments by business has been slashed from 44.3% to less than 20% in recent years, well-below the G7 average, yet our rate of business investment in machinery and equipment has also plummeted, from 7% of GDP in 1998 down to 3.8% last year. The additional tax breaks announced by Morneau in the mini-budget will reduce the METR down to 13.8%: less than a third of what it was two decades ago.
But will these even more targeted tax breaks for business investment actually work this time? There are lots of reasons to remain skeptical about this.
First of all, these tax breaks are only beneficial for corporations that are profitable and pay corporate income taxes. These are just 40% of all businesses across Canada, and they also tend to be larger corporations, who will be the greatest beneficiaries of these tax breaks.
Secondly, these tax breaks provide a short-term incentive for business to accelerate capital investment at a time when the overall economy is already growing at a decent pace, with record low unemployment rates. This is arguably at a time in the economic cycle when governments should scale back tax breaks so they are able to stimulate and boost investment when the economy slows. By accelerating business capital investments (and providing federal government subsidies for doing so), the federal government could be making the economic cycle worse.
Thirdly, our economy is changing in ways that make capital investment less important. Almost 80 percent of Canada’s employment is in services, which is less capital intensive. Businesses are also increasingly substituting contracted-out services (such as for cloud computing) for what had been capital investments. The largest and fastest growing corporations and many new economy businesses often require little in the way of capital investments. This isn’t to say that jobs in more capital-intensive traditional industries aren’t important, but we can expect them to become a shrinking share of total employment, especially with growing automation—and there are probably better ways to support them.
Fourthly, Trump’s trillions in business tax cuts, including accelerated depreciation, might slightly increase rates of growth of business investment in the U.S. this year compared to last year, but the boost is expected to be very temporary, with much of the money going instead into share buybacks, to shareholders and corporate executives instead.
The additional corporate tax breaks promised in Morneau’s mini-budget may attract some investment back across the border, but if so, it’s likely to be very limited and temporary. Canada’s Parliamentary Budget Office stated that Trump’s tax cuts“will not have a material impact on Canada’s investment climate” anyways.
It’s more likely that these billions in corporate tax breaks will go exactly where the other ones have gone, into higher corporate profits, share buybacks, mergers and acquisitions, increased corporate concentration, into the billions they’re holding in surplus cash, and into higher payouts to shareholders and corporate executives.
On the positive side, these tax cuts aren’t as bad as Trump’s nor as generous as business lobby groups were pushing for. They are temporary and more targeted to manufacturing, which may be more vulnerable to moving across the border. But that doesn’t mean that, at a cost of $14 billion over five years, that they’re better than nothing, or that they’re better than alternatives.
Instead of providing further tax breaks, we urged the federal governmentto introduce a national public single-payer pharmacare program instead. This would reduce costs for employers by up to $6 billion annually, more than these tax breaks would. A national pharmacare program would also benefit all businesses and employers—as well as individual Canadians—and not just larger profitable corporations. It would strengthen the competitive advantage all Canadian businesses have in relation to U.S. businesses and in ways that support good jobs in Canada.
These billions in additional corporate tax breaks may work in political terms, by procuring business support in the coming election year, but there’s little reason to believe that they’ll work in economic terms.
What we need instead is forward-looking domestic and international progressive tax reform for the 21stcentury that benefits the many, instead of the few, and that prevents this type of international tax competition that corporations and the wealthy continue to abuse for their advantage.