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Lower corporate tax rates = rise in corporate profits, decline in reinvestment in Canada (1988-2011)

June 25, 2011


Why do businesses no longer generate more investment in factories or equipment even as the government lowers corporate tax rates?

Is it because as wealth disparities intensified (Drummond and Tulk 2006) consumers were no longer able to purchase sufficient quantities of products and services? Drummond and Tulk (2006) predicted that in Canada alone wealth disparities would continue to intensify. Canada’s 22 billionaires and others in that elusive group of Ultra High Net Worth (UHNW) ie c. .004 % of Canadian families (Stenner et al., 2006 ), who hold more than $10,000,000 in assets. In sharp contrast to Canadians in the four lower quintiles, the UHNW benefited with large increases in wealth since 1984.

Or is it influenced by CEOs focus on shareholders’ desire for increasing short-term stock prices?

Marriner S. Eccles, Franklin D. Roosevelt’s chairman of the Federal Reserve from 1934 to 1948, in his non-fiction entitled Beckoning Frontiers (1951):

“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth—not of existing wealth, but of wealth as it is currently produced—to provide men with buying power equal to the amount of goods and services offered by the nation’s economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

Stanford, Jim. 2011-04. “Having Their Cake and Eating It Too: Business Profits, Taxes, and Investment in Canada: 1961 Through 2010.”

Jim Stanford is an economist with the Canadian Auto Workers and a CCPA Research Associate. He is also the author of Economics for Everyone, published by the Canadian Centre for Policy Alternatives in 2008.

“Historical evidence regarding the effects of successive rounds of business tax reductions (in 1988, 2001, and more recently under the Harper government) do not support the claim that these tax reductions will provide a major boost to business capital spending [business fixed investment spending includes structures, machinery & equipment ]. Particularly given the growing divergence between after-tax cash flow and business non-residential capital spending, and the resulting accumulation of uninvested cash, additional reductions in corporate tax rates are like “pushing on a string.” On the basis of the evidence assembled here, government would have a more direct and powerful impact on investment spending (both private and public) by emphasizing direct increases in expenditure (directed especially at public capital and infrastructure expansion), rather than additional tax reductions for businesses—which are both economically ineffective and distributionally regressive (Stanford 2011-04 p.27).”

  • More focused fiscal measures (such as investment tax credits and/or accelerated depreciation provisions), which require businesses to increase investment before they receive the resulting fiscal incentives, are more effective in stimulating incremental investment spending than across-the-board no-strings-attached reductions in the general corporate tax rate.
  • The total increase in investment resulting from a $6 billion allocation to infrastructure ($6.52 billion, public and private) is over ten times as great as the increase in private investment only ($601 million) resulting from a $6 billion allocation to business tax cuts (Stanford 2011-04 p.3).”
  • If the federal government spent $6 billion on new public investment projects (such as infrastructure construction), instead of business tax reductions it would stimulate almost as much private business investment.


Department of Finance Canada. 2010. “Table A.1.” Canada’s Economic Action Plan Report #6, September. p. 142.

  • Infrastructure spending carries a relatively large GDP multiplier effect of 1.6-to-1 (reflecting the spin-off impact of construction projects on upstream supply purchases and downstream consumer spending). 26 Dept. of Finance Canada (2010), Table A.1, p. 142.
  • Public investment increases private investment thanks to the resulting expansion of the overall economy (Stanford 2011-04 p.3).”
  • The indirect spin-off impact of the resulting boost of GDP (of almost $10 billion) on private business spending is almost as great ($520 million, according to the coefficients from the post-reform regression) as the direct boost to investment if the $6 billion had been fully allocated to business tax cuts (Stanford 2011-04 p.3).”

2013 Combined federal-provincial statutory tax rates will have been cut in half by 2013, compared to the early 1980s (Stanford 2011-04 p.3).”

2011 After-tax corporate cash flows increased but business investment (into new expenditures on fixed non-residential capital in Canada) decreased (2001-2011). This uninvested cash flow now totals c$750 B. This gap between cash flow and business investment continues to grow.

2011 By 2011 business investment had declined by 1 full percentage point of GDP —even though after-tax business cash flow had increased (in part as a direct result of the tax reforms) by 3 to 4 percentage points of GDP. The proportion of after-tax cash flow which Canadian firms re-invest in fixed non-residential capital has declined from near 100 percent before the tax reforms in 1988, to less than 70 percent today […] Thus the proposed 3-point reduction in corporate tax rates would stimulate only about $600 million of new investment. (Stanford 2011-04 p.3).”

2011 Corporate income taxes reduced by another 1.5 percentage point. It will go down to 15 percent in 2012.

2011 The business sector was the only sector in Canada’s economy still spending less in 2011 than in 2008 before the recession started. In contrast, consumer spending and government spending have both increased substantially (partly as a result of pro-active stimulus efforts by policy-makers, including lower interest rates and discretionary fiscal policy).

2010 Corporate income taxes reduced to 18 percent.

2009 “Business fixed investment spending (considering both structures and machinery & equipment) had declined by 24 percent in real terms from the autumn of 2008 through the end of 2009. That decline was the worst since the Great Depression of the 1930s (Cross, 2011), and was the steepest decline in spending experienced in any sector of Canada’s economy during the recession (Stanford 2011-04 p.3).”

2008 Stephen Harper lowered the statutory rate to 18 percent.

2008 Following the global financial crisis there was a dramatic downturn in investment spending by Canadian businesses resulting in a sharp recession in Canada’s domestic economy.

2007 Corporate income taxes reduced (cut from 22.1 percent in 2007 (including the former 1.1 percent federal surtax) to 18 percent by 2010.

2004 Prime Minister Jean Chrétien and Finance Minister Paul Martin implemented a further reduction in the statutory rate to 21 percent by 2004. (Stanford 2011-04).”

2001 Prime Minister Jean Chrétien and Finance Minister Paul Martin implemented a further reduction in the statutory rate. The effective rate began to decline following these cuts […] Since 2001, Canadian corporations have received a cumulative total of $745 billion in after-tax cash flow which they have not re-invested into Canadian fixed nonresidential capital projects (Stanford 2011-04 p.3).”

1988 Under the Conservative government of Brian Mulroney, the federal statutory tax rate was reduced from 36 percent to 28 percent (not including a 1.1 percent surtax). At the same time, however, numerous tax loopholes which reduced effective business taxes were closed. The net impact on final taxes paid by business was therefore muted.Implementation of the first round of business tax reforms and reductions. […] By 2011 business investment had declined by 1 full percentage point of GDP —even though after-tax business cash flow had increased (in part as a direct result of the tax reforms) by 3 to 4 percentage points of GDP. The proportion of after-tax cash flow which Canadian firms re-invest in fixed non-residential capital has declined from near 100 percent before the tax reforms, to less than 70 percent today (Stanford 2011-04 p.3).”

1985 Since the mid-1980s, therefore, business investment spending has declined, but business cash flow has increased. The result is a growing gap between cash flow and business investment (Stanford 2011-04).”

1981 OECD began to keep a comprehensive database of combined Canadian federal-provincial statutory rates.

1960s-1970s Aggregate investment spending was high as a share of total Canadian GDP. Total national capital spending accounted for over 20 percent of Canada’s GDP. Economies tend to grow faster, experience faster productivity growth and rapidly growing incomes when this happens (Stanford 2011-04 p.3).”

1945-1975 Businesses generally reinvested their full cash flow into the Canadian economy. That is almost 100% of corporate share of after-tax
corporate cash flow was reinvested in new fixed non-residential capital investment.

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