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but are not paid in actual cash. Hence a company’s cash flow is not reduced by CCA charges, only its re- ported profits.
6 Business investments in non-tangible assets have
also declined during this period. For example, busi- ness R&D expenditures in Canada have declined by about one-third as a share of GDP since 2001.
7 Because of sharp fluctuations in before-tax profits
(such as associated with recessions and recoveries), this estimate of the effective tax rate can fluctuate significantly even without any changes in tax policy, but the longer-run average is still a reasonable meas- ure of the ongoing actual tax burden on business.
8 The increase in the apparent effective tax rate in
2010 is an anomaly reflecting the sharp decline in 2009 business profits associated with the recession; in this case, our method of relating taxes paid to pre- vious year’s profits produces a misleading estimate.
9 Note that the period of time covered by each sub-
period does not correspond to the period of time each government was in office; they correspond, rather, to the period of time until the next successive tax re- form was implemented.
1 According to data published by Canada Revenue
Agency (2010), two-thirds of all taxable dividend in- come, and three-quarters of all taxable capital gains, were received by tax-filers with income in excess of $100,000 in 2008 (a group which represents just over 5 percent of all tax-filers).
2 Cross (2011) reports that if ancillary investment
spending related to petroleum and mining projects (such as petroleum refineries and pipelines, and pri- mary metal processing facilities) are included, then the energy and mining sectors will account for a re- cord 45 percent of total business non-residential fixed capital spending in 2011. This is a further indication of the dramatic extent to which Canada’s economy is becoming dependent on the extraction of non-renew- able resources, discussed further in Stanford (2008b).
3 The net capital stock data in Figure 2 is calculated
on a geometric (infinite depreciation) basis; this ra- tio compares nominal capital stock to nominal GDP.
4 The capital-labour ratios in Figure 2 are equal to
the real net capital stock (geometric depreciation, in chained $2002) divided by total employment.
5 Capital consumption allowances (CCA) represent
charges which are deducted from a company’s prof- its to reflect the wear-and-tear of existing capital,
(1999) find very low responsiveness of investment to the cost of capital even in micro data.
18 This eclecticism might be less welcome within a
strict Walrasian framework.
19 This is a very modest impact; the same CME study
predicts that more focused investment measures, such as the permanent implementation of two-year depre- ciation rules on new machinery, would have much larger positive impacts on investment.
20 A simple estimate of the foregone revenue associ-
ated with the 3-point tax reduction suggests that the cumulative cost of the tax reduction would at least match the $49 billion in new investment anticipated by Chen and Mintz, implying that even in their model the tax cut elicits at most one dollar in investment for each dollar in tax cut savings. To see this, consider that current before-tax corporate profits currently equal about $200 billion; assume conservatively that they grow at 5 percent per year (equal to anticipated nominal GDP growth). Over a seven-year period, the cumulative foregone taxes from the 3-point tax reduc- tion sum to $49 billion. In reality, profits will grow faster than GDP as business profitability continues to recover form the recession, and hence the fore- gone revenue loss will be greater than the predicted increase in cumulative capital investment.
21 The simulation further assumes that the relationship
between investment and employment is determined according to a Cobb-Douglas production function, which in turn requires that factor shares of nation- al income are fixed over time. We have already seen that this is not the case: the corporate income share of GDP has grown notably since the 1980s, while the labour share of GDP has correspondingly declined.
22 Erin Weir first pointed out this problems after
Parsons’ study was published.
23 The Chen-Mintz work cites only the higher 0.7 es-
timate, without noting that Parsons’ work reported possible elasticities as low as 0.3.
24 But in observed experience, the investment rate
(investment as a share of starting capital) declined from 2000 through 2010.
10 Of course, since these rates continued to fall
through the Harper reform period, the end-points for tax rates were even lower than the 2008–10 aver- ages would indicate.
11 Note that most of the 2008–10 period covered
by the Harper era we have defined, consisted of the 2008–09 recession and subsequent slow recovery (when business profits shrank). This average level of profits, therefore, understates the underlying struc- tural improvement in before-tax profits; prior to the recession, before-tax profits reached 16 percent of GDP — the highest in Canadian history, and a peak increase of over 4 percentage points of GDP compared to the pre-reform average (rather than the 1-point in- crease reported in Table 1).
12 Again, the recession pulled down these averages
for the 2008–10 Harper era, and hence understate the improvement in longer-run profitability and cash flow.
13 The total stock of liquid assets held by non-finan-
cial businesses in Canada was almost one-half tril- lion dollars at end-2010. Businesses normally require a stock of cash and liquid assets to conduct their af- fairs, however, so we have defined the “excess” as only the amount corresponding to the increase in the share of liquid assets as a proportion of GDP, compared to pre-2001 averages.
14 Figure 6 utilizes annual data from 1981 through 2010,
based on OECD (2010); Figure 7 uses quarterly effec- tive tax rates estimated from Statistics Canada data as described earlier, from 1961 through 2010. Figure 7 thus contains many more data points than Figure 6.
15 The coefficient of correlation is +0.250 for the statu-
tory tax rate, and -0.174 for the effective tax rate; nei- ther is statistically significant.
16 Fazzari (1999) explores three specific links in the
chain of economic logic required to claim that lower business taxes will elicit more business investment, and finds all of them to be weak.
17 Even many microeconomic-based studies find that
neoclassical optimizing behaviour is difficult to find in regression analysis; for example, Chirinko et al.
its and/or accelerated depreciation provisions),which require businesses to increase investment before they receive the resulting fiscal incentives, are more effec- tive in stimulating incremental investment spending than across-the-board no-strings-attached reductions in the general corporate tax rate.
25 A set of tables fully describing the regression re-
sults of all scenarios reported in this paper is avail- able on request from the author.
26 Dept. of Finance Canada (2010), Table A.1, p. 142. 27 While we have not modeled them directly in the
regression results reported above, it is likely that more focused fiscal measures (such as investment tax cred-
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