Gordon V Jackson: the corporate tax cut myth

Apparently Stephen Gordon is having a hard time figuring out where Andrew Jackson, the chief economist for the CLC, got the bizarre idea that:

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.

Stephen replies in the comments section:

No. That’s not the argument. At least, I’ve never heard anyone make it.

No one, ever, anywhere, has insinuated or made that argument.  Really?  To continue reading and comment click.

Profit, wage, NDP, and tax revenue growth in Newfoundland and Labrador

Although I covered it off in my rebuttal to the Minister of Finance Thomas Marshall  in the last post I thought maybe a graphic would be a more compelling way to illustrate what has been going on in Newfoundland and Labrador.  I am sticking with roughly the same time frame as the minister but I will take 1996 as my base year and end in 2009.  This is generous on my part because if I took 1997 and ran through to 2010 it would show the rebound in corporate profits in 2010 and start from Tom’s trough year (1997).  So what I have done is create an index by normalizing the time series to 100 for 1996.  Here I have graphed profits before taxes (profits), total labour compensation (wages), net domestic product (NDP) and all tax revenues after subsidies (tax) save for royalties.  All values are nominal.

Click for a crisper image

So yes some wage growth but nothing sufficient to bring the wages of workers in the province up to the national average.  This in the context of a province caught up in tidal wave of profits.  Keep in mind that in the interview the minister only cited wage growth and was silent about the near exponential rate of growth in profits.  But thanks to that provocation I included taxes and economic growth (captured by NDP).

Two things stand out.  Wages did not manage to keep pace with economic growth (NDP) and tax revenue growth was relatively flat.  This tells me that the government in the province has essentially been using tax cuts to make workers, corporations and small business feel wealthier while at the same time jacking up public spending and paying for all of it with royalty revenues. From a political point of view it is a slam dunk.  The problem is that it leaves the province highly dependent on oil revenue to grease the wheels and pay for public infrastructure and services, which in turn gives the oil and gas sector even more clout and it does very little in terms of economic diversification.

Some conservative economists in the province have recognised the instability in the fiscal structure but their solution is rather unimaginative: rapid provincial debt repayment and spending cuts.  But this solution is equally as short sighted as the government’s.  Neither account for what happens after the oil.  When that actually happens is hard to call but it will.  For conservative economists I suppose this is not a problem.  Diversification happens naturally so they do not need to tell a story about what comes after the oil.  Curiously though, if they truly believe something does come after the oil then it makes little sense to be worried about the provincial debt and declining oil revenues as something will come up to replace the sector.

If on the other hand the province’s actual history of lurching from one commodity boom to bust and bankruptcy and then administration by Whitehall and later by Ottawa is anything to go by then the government cannot really afford to be so reckless.  So if you agree that austerity is not the route to take then you are left with the need for economic diversification and modernization all while keeping the growth of the public debt at a low rate.  That leaves tax increases and or a more robust royalty regime in order to change the fiscal structure and engage in an aggressive process of modernization and diversification without blowing the lid off public debt which as it now stands is a very modest 27-28%.

The irony of greed: The end game for Neoliberalism?

The global economy is in the toilet and the Boomers’ representatives are chanting: “flush, flush, flush.”  Me? I am eating cigarettes and wine while admiring the remarkable consistency in the myopia of all of it.

In the name of fiscal prudence the whole of the advanced capitalist zone is in engaged in austerity budgeting and calls for more of the same.  Even Martin Wolf, in his otherwise insightful column in the FT online today, felt the need to tap his hat and nod in the direction of the genteelism of supply.  Exhibit A, the conclusion to his incisive intervention:

Reconsidering fiscal policy is not all that is needed. Monetary policy still has an important role. So, too, do supply-side reforms, particularly changes in taxation that promote investment. So, not least, does global rebalancing. Yet now, in a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings.

As is widely acknowledged, monetary policy has little outside of conciliatory role to play at this time.  In so far as the CBs should not make the mistake of tightening policy as the ECB and the BoC did.  But apart from the role of spoiler there really is not much left for the CBs to do.  The problem is squarely fiscal.  As Wolf himself went to pains to argue.  Why then the conclusion given that further tax reductions are not only going to make the fiscal positions of governments worse they will also likely have the same effect as lowering interest rates at this time:  Nadda, ziltch, rien, nothing?  The problem is that Wolf has to tip his hat to conventional wisdom.  If not; he has no hope of bending the ears of policy makers.  Oh well, that is his plight not mine.

Here, given none are listening we may speak frankly.  The world economy is in the toilet because free trade, tax cuts, deregulation and above all the liberalization of finance over the last thirty years let loose a Tsunami of forces both economic and political.  The liberalization of finance and production allowed for the national gutting and then global whipsawing of labour.  As the profiteers profited and retired workers slept while the assets they had built were being systematically stripped and the fortunes being amassed were then turned to the seedy business (although a time honoured practice if one cares to actually read Smith) of buying off the government–and it must be stressed the intelligentsia too–broadly understood.

We now have the perfect storm.  A generation of public and private sector functionaries has been trained to believe that the market can do no wrong and the government no good.  As a corollary is of course the proposition that monetary and regressive tax policy is everything.

The irony, of course, is that any credible account of the present crisis would have to admit that we are here because free trade, tax cuts, deregulation, the flexibilization of labour markets  and above all the liberalization of finance brought us here.  How odd it is then that we should be treated to more of  the same as the cure for what ails us.

Corporate tax cuts, employmnent and aggregate demand

I was busy trying to write something all day on the issue. But the good citizens over at the Progressive Economics Forum pumped out one serious post after another. So all I can say is go read the posts. Oh and shop the comments for Stephen Gordon’s rebuttal.

Can we please now get back to employment. You know like the thing that actually moves investment.

Taken together, these two pieces of evidence seem to suggest that in Canada a more likely channel for bringing about higher investment is via lowering the unemployment rate.

And Since Gordon has already confessed corporate income tax rates have nothing really to with jobs then we might just well ask what does?

It aggregate demand stupid.

Lifetime investment hypothesis

Last odd thought before sleep.  What if we think of investment as a lifetime investment function akin to the lifetime incomes hypothesis?  How would that change the standard view on corporate income tax and investment rates?

Let us assume that investment is a constant function of output.  Thus investment today is a function of long term output growth in each sector.  This fits the facts: in Canada manufacturing investment is pretty stable around 4 and 5.5 % of output over the last thirty years.  Let us also assume that investment is not directly related to profits.  This also fits the facts as investment as a percent of profits is highly volatile and negative.  What then accounts for the fluctuation in investment rates as a percent of output?

If as I have above that investment is a near constant of output then we might be tempted to write:

I = A + q * 1-Y

Where I is investment, A is a fixed independent part (the amount that needs to be invested to maintain medium run growth rates) q is a proportional share of un-anticipated output growth (Y) for the sector.

This tells us a couple of things.  Investment decisions today are determined by commitments made at t-1 and the actual level of output growth realized from those investments.  So if present realized output levels are higher then expected investment levels increase, if lower than expectations they decrease.

This is a nice formulation because it actually gives a material explanation to investment rates with respect to output and anticipations.

But what does all this have to do with corporate taxes.  Quite a bit.  Given capital depreciations allowances, corporations can write-off investment in plant and equipment and as such their decision to invest in expanding production is only tenuously related to tax rates.  What however will induce corporations to invest is an exogenous increase in demand for the sectors output given by q * 1-Y.

Within limits, corporate tax rates are therefore of little consequence on investment decisions.

Update to conclusion: If CIT cuts permanently increased demand then they would lead to a permanent increase in investment.