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Alberta NDP corporate tax hike backed by decades of economic research: tax cuts don’t help the economy

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While it may not win the votes of C-suite executives, the Alberta NDP’s plan to raise the tax rate for large corporations recognizes what economists have been documenting for decades now: corporate tax cuts do nothing to benefit the economy.

The Alberta NDP is proposing to restore the provincial tax rate to 11 per cent, the rate that was in place before the UCP government slashed it to 8 per cent in 2020.

A growing body of economic research shows that tax cuts for big corporations don’t create jobs or investment – instead costing governments billions in lost revenue.

Albertans don’t need to look far to see how corporate tax cuts have failed to deliver the economic gains they were promised. A 2022 study by the Parkland Institute looked at the effect of the UCP’s 2019 tax cut on the largest companies in Alberta’s oil industry. Even though corporations received $4.3 billion from the cut, they eliminated thousands of employees from their payrolls – losses driven mostly by automation and industry consolidation, the study found.

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The same companies added millions to the compensation of their CEOs and paid out record dividends to shareholders. Meanwhile, the Alberta public paid the price: billions in tax revenue.

This ‘trickle-up’ trend has been well documented by economists across multiple jurisdictions. One of the largest studies of its kind, by the London School of Economics, confirmed that 50 years of tax cuts in 18 developed countries did not grow the economy but likely contributed to inequality.

The reality that corporate tax cuts do not trickle down is even understood by some conservative politicians.

Former British PM Liz Truss walked back a promise to slash taxes for businesses after facing criticism from the International Monetary Fund which cautioned further tax cuts would worsen economic conditions. A study published last year showed business investment in the U.K. fell to the lowest rate in the G7 group of wealthy nations despite 15 years of corporate tax cuts.

Lessons can also be learned from other provinces. The B.C. Liberals slashed taxes for businesses and individuals over a decade, assuring the cuts would “pay for themselves”. The cuts did not fulfill that promise, however, they did cost the province at least $8 billion in lost revenue.

In Canada, decades of successive cuts by federal Liberal and Conservative governments were followed by a steady decrease in business investment in productive capacity. Corporations allocated about 37 per cent of gross corporate profit back into productive assets back in the 1990s. That amount fell to 25 per cent in the 2010s and only 19 per cent in 2021 despite record corporate profits that year.

This trend was evident even back in 2012, when Canada’s former Governor of the Bank of Canada, Mark Carney, cautioned corporations to stop hoarding money and either put it ‘to work’ or return it to investors. Corporations chose the latter as dividend payments climbed in following years alongside record-high executive compensation. This has contributed to excess wealth concentration, which expert bodies such as the OECD and IMF recognize as harmful to the economy.

But there is no starker evidence that corporate tax cuts do not work than what has happened in Alberta.

Alberta’s UPC government slashed the provincial corporate tax rate in 2019-20. Did that lead to more investment in 2021? No. Alberta’s oil and gas companies made record profits in 2021. Did that lead to more investment in 2022? No. In fact, capital expenditure by Alberta’s public companies was lower in both years than in 2018 when the provincial rate was at 12 per cent.

To recover from the pandemic, the Alberta government will need to raise revenue to strengthen public services, help households through inflation, and invest in economic transformation. Albertans know that the province can no longer bank on oil wealth. They will not be well-served by politicians who refuse to acknowledge this reality.

At a time when large corporations are making record profits while increasing CEO and shareholder wealth, they can certainly afford to contribute a greater share of their profits to public investments and growing the economy. It is refreshing to see the Alberta NDP acknowledge that raising the tax rate for large corporations is not only fair but makes good fiscal sense.

DT Cochrane is an economist and policy researcher with Canadians for Tax Fairness, a non-profit organization that advocates for fair tax policies to strengthen the economy and reduce inequality.

 

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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