Monday, May 28, 2018

Corporate taxes do not affect economic growth, and the sky will not fall with an NDP government

The so-called business "community" tends to take it as an article of faith that lower corporate taxes are a good thing and will help grow the economy, and many business writers take an almost reflex sky-is-falling attitude to any talk of a possible NDP "socialist" government. Well, there is a distinct possibility of an NDP government in Ontario very soon and, predictably enough, yet another such article appeared in the Report on Business section of the Globe today.
But, as articles of faith so often are, such beliefs are built on very shaky empirical evidence. While economic theory - with all its various assumptions and simplifications - may suggest that lower corporate taxes should lead to companies investing more in their businesses, increased wages for workers, lower costs for consumers, and all sorts of other good things, in the real world the extra cash is actually more likely to end up lining the pockets of already-wealthy shareholders. Various real-world studies have tried to follow the effects of corporate tax rates, and have come to the conclusion that they actually have very little effect on companies performances and on the economy in general.
Just this year, the prestigious Kellogg School if Management published a study suggesting that lowering corporate tax rates only spurs the economy when those rates are extremely high, and by "rates" they mean the effective rates rather than the official posted rate (just before Donald Trump's much ballyhooed recent tax cuts, the official US rate was an ostensibly high 35%, but with the various rebates and discounts available, the effective rate was actually typically below 20%). In general, though, the study concludes that history shows no strong link between corporate tax rates and economic growth.
Several other studies, including ones by the Institute for Policy Studies, New York University and Cornell University, have come to broadly similar conclusions.
Given all this, and bearing in mind that this is a 2018 NDP with a very centrist, non-radical platform, not dissimilar to that of the Liberals, but very different (and less radical) than that of the Progressive Conservatives, then I would have thought that the hordes of Ontarians who are, reasonably enough, looking for a change from Kathleen Wynne and her Liberals would be much safer parking their votes with the NDP. The sky is very unlikely to fall.

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