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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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U.S. economy and new incentives put Canada at disadvantage in Stellantis negotiations, professor says

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Two weeks of negotiations between the federal and provincial governments and Stellantis have failed to produce a new deal for the NextStar EV battery plant in Windsor, Ont. Ian Lee, an associate professor at Carleton University’s Sprott School of Business, says the economic might of the U.S., coupled with the incentives offered in recent legislation, make it extremely challenging for Canada to compete.

 

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Watch Moody's Analytics' Ell on Asia Economy – Bloomberg

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Watch Moody’s Analytics’ Ell on Asia Economy  Bloomberg

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Theo Argitis and Robert Asselin: Trudeau can't keep juicing the economy with more spending – Financial Post

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World entering period of scarcity, meaning Canada won’t be able to spend its way to prosperity

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The unexpected pick up in Canadian inflation last month — even if it turns out to be a blip — is a fresh reminder that Prime Minister Justin Trudeau’s government is facing a more perilous economic policy landscape going forward, with difficult trade-offs on the horizon.

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The natural economic instinct of this government has been generous budget spending and open international migration.

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Yet, Trudeau doesn’t need to look much further than Statistics Canada’s inflation numbers or last week’s call from the G7 for global “de-risking” to see how things are changing.

With the world entering a period of scarcity — from more expensive money to supply constraints — the rationale to juice the nation’s economy is weakening.

The housing crisis is a manifestation of that, as are broader price pressures and the Bank of Canada’s historically aggressive run of interest rate hikes.

Trudeau came to power in 2015 on an anti-austerity platform to reverse his Conservative predecessor’s sluggish growth record which, as the Liberals were quick to remind Canadians at the time, was the weakest since R.B. Bennet was prime minister in the 1930s.

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The economics were sound at the time, even if the growth dividend didn’t pay off.

Canada’s economy was demand deficient early in Trudeau’s mandate as commodity prices slumped, while the extra spending helped ease financial stability risks by taking some pressure off the Bank of Canada to stoke growth.

Higher international migration drove gains in labour income and provided support to a housing market that was still largely within reach of affordability. Inflation wasn’t a worry. In fact, the concern for policymakers was it may not have been high enough.

New social programs, meanwhile, allowed the government to make significant strides on equality and redistribution — particularly with respect to lowering poverty.

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The Trudeau administration’s weighty policy objectives were synergetic to the economic environment. Policies were rowing more or less in the same direction.

The current post-pandemic environment, though, is no longer as accommodating.

While many policymakers and economists still buy into a moderately optimistic outlook, with continued growth and inflation brought into check, less favourable outcomes are increasingly plausible.

There is a real possibility that inflation and interest rates will remain well above pre-pandemic levels, growth becomes more anemic, budget dynamics worsen and the climate transition proves costly.

Instead of working in concert, the government’s three core economic policy objectives — growth, equity and price stability — could become increasingly in conflict.

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For example, increasing immigration is a long-term positive for an economy threatened by aging demographics. And more social spending is typically associated with less inequality.

But higher borrowing costs stoked by large increases in population and government spending will impact disproportionately lower income Canadians and young families, potentially creating divisions and threatening new sorts of inequality.

Add energy transition to the mix and national security issues and the landscape becomes a minefield.

The policy arena will be more ambiguous and the government pulled in multiple directions. Policy paralysis, wasted effort and poor allocation of resources are real risks.

There are certain fundamentals and policy guardrails, however, that can help the government navigate this challenge.

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A construction worker frames a new home in London, Ont.
Temporarily slowing the pace of entrants to allow housing supply to catch up could be a good solution to the current housing crisis. Photo by Mike Hensen/The London Free Press/Postmedia Network

First, policymakers should prioritize growing GDP on a per capita basis and increasing productivity over expanding the overall aggregate economy. Both are important, but the former is where true prosperity lies and where Canada is failing. Masking underlying weakness with gains in national income is just a recipe for stagnant wages. Enhanced productivity also helps dampen inflationary pressures.

Second, toolkits and policy precision matter.

For example, supply side solutions are critical to productivity, but policymakers also need to be cognizant of short-term impacts in an inflationary world. Focusing more on economic migration and temporarily slowing the pace of new entrants to allow housing supply to catch up appears a reasonable solution to the current housing crisis.

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Another example is industrial policy, which needs to become more sophisticated. Advanced economies will compete in advanced industries, where there is a concentration of R&D and skilled workers. Quick fixes through corporate subsidies, however, are not the answer. Canada needs a modern science and technology architecture that translates ideas into economic outputs, higher wages and better living standards.

The third guardrail is the most Canadian: be reasonable and pragmatic.

This seems obvious but we should not take this principle for granted, particularly as we rush (rightly) to meet ambitious climate targets. Canada remains a resource economy. The sector pays a lot of bills, keeps our currency stable and government finances flush with cash.

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It’s also where any global power we may have as a nation lies. That makes an orderly climate transition paramount.

Theo Argitis is managing partner at Compass Rose Group. Robert Asselin is senior vice-president, policy at the Business Council of Canada.

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