Corporate tax cuts, foreign ownership, and dividends: a less than compelling case

Travis Fast

If the facts are anything to go by there is not much good that can be said in favour of corporate tax cuts. The facts in no particular order are something like this.

First, corporate taxes as a percent of corporate profits have never been so low. Just click on the graph below.

Second, corporate profits before and after taxes in 2006 as a percent of GDP were already at historic 45 year highs. And notice just how much profits after taxes improved in the 2000s. Clearly corporate Canada has been doing just fine–smashing historical record without the aid of further tax cuts. Click on the image below.

But surely you ask: “Who cares about corporate profits because ultimately they get returned to Canadian shareholders . ” Nope. well some. In fact two things have happened with dividends. On the one hand corporations are retaining their earnings what Statistics Canada calls undistributed corporate profits. By-and-large corporations are hoarding cash. Click on the image below. In that graph three metrics are provided. Undistributed corporate profits (UCP) before and after taxes as a percent of total profits (TP) and UCP as a percent of TP retained in Canada. Lots of cash on hand it seems.

On the other hand, the total amount of Canadian equity owned by Canadians has been steadily decreasing over time so that by 2006 dividends as a percent of total profits paid to Canadians were a poultry 7.7 %. Again click on image below.

So what is the rational for corporate tax cuts given the facts.  Fact one, corporations are flush with retained earnings and were already so prior to 2006.  Fact two, corporate after tax profits were already at an all time high by 2006.  Fact three, for every dollar of corporate profits only 26 cents are distributed to shareholders.  Fact four, for every dollar of profits distributed to shareholders only 42 cents are distributed to Canadian shareholders –which means corporate tax cuts in the majority benefit foreigners.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s