Canada's Corporate Tax Cuts Prompt Companies To Hoard Cash, Not Hire, CLC Says

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The corporate tax cuts that were supposed to create new jobs have instead allowed companies to hoard cash, pay out larger dividends to shareholders and beef up executive salaries, says a report from the Canadian Labour Congress.

The umbrella group of labour organizations says the massive corporate tax cuts that have been put into place since 2000 have allowed Canadian companies to amass some $477 billion in cash reserves, up from $157 billion in 2001.

The Liberal governments of Jean Chretien and Paul Martin began dropping the corporate tax rate incrementally in 2000. It fell from 28 per cent that year, to 21 per cent in 2006, when the Conservatives came into power. They further chopped the tax rate to the current 15 per cent, which went into effect at the start of the year.

The CLC's report argues that, far from translating into new jobs, the money corporations saved ended up fattening the country's one-percenters, through higher executive salaries and bigger payouts to investors.

The report, What Did Corporate Tax Cuts Deliver?, says Corporate Tax Freedom Day -- the day when corporations are fully paid up in taxes for the year -- is now February 1, up from late February a decade ago.

Corporate income taxes in 2010 amounted to only 8.8 per cent of all government revenues,” CLC President Ken Georgetti said in a statement. “The Conservative government's latest round of tax giveaways on January 1st means Corporate Tax Freedom Day will arrive on an even earlier date in years to come.”

By comparison, Tax Freedom Day for individual earners typically falls in May or June.

The report notes that, even as corporate taxes dropped, capital investment by private corporations fell “significantly.”

“The argument for corporate income tax cuts has been that increased after-tax corporate profits would be re-invested in company operations, boosting economic growth, productivity, and jobs,” the CLC wrote on its website. “However, studies have shown that rising corporate after-tax profits have not resulted in increased real investment.”

What money isn’t kept in the bank is increasingly ending up in the hands of shareholders and executives, the CLC said.

“Dividends as a percentage of after-tax profits have risen from 30% in 2000 to over 50% in recent years,” the report states.

Each percentage point decrease in corporate taxes costs the federal government $2 billion in foregone revenue, the study notes, indicating that the total decrease in corporate taxes has reduced government revenue by about $26 billion.

The federal government posted a deficit of $33.4 billion in the 2010-2011 fiscal year.

“The government has been borrowing money to pay for its corporate tax giveaways. Now, to pay for tax breaks, the government is planning to make massive cuts to public services, such as meat inspection, that are essential to Canadians,” the CLC stated.

The CLC’s Georgetti says if corporations aren’t going to invest in new jobs, the government should take the tax cut money and use it to create jobs itself.

Citing the Finance Department, Georgetti said $1 billion spent on infrastructure development would create five times as many jobs as a $1-billion corporate tax cut.

Corporate tax rates are only one factor that companies consider when deciding whether to invest, the CLC report argues.

“Ultimately, an investment will be made if expected returns exceed a break-even level. Canada does not have to be the lowest tax jurisdiction in North America or the world to provide good corporate investment opportunities so long as corporations can find what they value.”

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