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.

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.

Further evidence that canadian capitalist prefer tax scams over productivity

What do Canadian businesses do with the money they receive in tax cuts. Well partially, pace this article in the Globe and Mail, they engage in elaborate schemes to defraud revenue Canada.

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.

Understanding Corporate Tax Cuts: embracing conventional wisdom and coming to radical conclusions

Warning this post contains scenes of graphic illustration, it is not intended for short attention spans or people who can not locate coordinates in two dimensional space.  Viewer patience is therefore highly advised.

The debate on corporate income taxes brings out a really nice teachable moment in that it provides an occasion to clarify the terrain of past present and likely future debates on macroeconomic policy.  In what follows I will hew closely to the standard story, but what I intend to show is that even within the terms of the conventional collective memory there is an important contradiction that helps clarify what the real debate over corporate cuts ought to be about.  Let me see if I can deliver.

The conventional account of history runs something like this.  By the 1970s and early 80s unions had become too strong, unemployment insurance and welfare programs too generous and together they produced highly distorting macroeconomic outcomes: high unemployment, high inflation and low output (referred to at the time as stagflation).  Let me just accept this account for argument sake because I think it represents the story in the back of the head of most policy makers and economists over forty.  Let us represent this conventional story by line A in the diagram below.  Notice the oscillating line around A.  That represents the economic cycle.  From the vantage point of policy makers and economists over forty  the problem with the Keynesians is that they were preoccupied with stabilizing those oscillations when they should have been preoccupied with moving the economy towards line B.  Line B represents an equilibrium in which both employment creation and output proceed in a balanced manner.

Point Y represents the bad equilibrium that Keynesians were unwittingly fixated.  In their drive to stabilize the macro economy via employment they gave short thrift to output and thus created an inflationary environment which produced increasing high levels of unemployment, low levels of output and high levels of inflation. In time policy makers and economists shifted their attention away from cyclical stabilisation to structural change .  That is, from attempting to smooth the oscillations around line A to moving the macroeconomic trajectory from line A to B.

Notice that point Y does not entail a lower level of employment but rather a higher level of output.  And this was what was so seductive about the supply side arguments of that time.  What they in fact said was that it was possible to maintain employment and increase output provided the appropriate structural reforms were undertaken.  Everybody and I mean everybody wanted lower inflation and higher employment.  And in the face of stagflation the punters got onside and away we went.

My argument is simply this.  After the largely successful attack on trade unions was accomplished, after the reform of both welfare and unemployment insurance programs were completed and within the context of free trade and capital mobility the real impact of he structural changes was to move the economy to line C point Z.  That is to say, even granting neoliberalism was not some radical attempt to reconfigure income and wealth distribution between economic classes the structural reforms were more successful than its antagonists imagined and thus instead of landing on trajectory B point Y we landed on trajectory C, point Z.

When therefore there is the call to cut corporate income taxes it explicitly assumes that the Canadian economy is still stuck on trajectory A point X.  But if in fact we are on trajectory C, point Z; we are thus in fact stuck at a bad equilibrium.  The move to further juice up output without a commitment to juice up employment is like the Keynesians of yore trying to smooth the oscillations around a bad equilibrium. But this time around it is employment which is lacking not output capacity.

What does this have to do with corporate tax cuts?  Corporate income tax cuts are suppose to be a stimulus to increase the output capacity of the Canadian economy over the medium to long term.  But if as is widely recognized output is not the problem but employment why are we even talking about supply side measures (i,e. corporate tax cuts)?

I think economists are still fighting the last war and not the war we are in.  And as any historian of war will tell you an army that does so will loose.

Update: this is not as radical an idea as it may appear: see this article in the business section of the Globe online.  The difference with Canada is that I think are debt growth is papering over the underlying bad equilibrium.

Corproate tax cuts : And I say unto thee go sell it on the mountain

I think the conservative attempt to sell CIT cuts as a jobs programme for today is the dumbest thing since the Cabbage Patch Kid Doll. And I think the CME and C.D Howe and Jack Mintz lining up to buy one is a mark of immaturity. If the exporters want to claim that CIT cuts will help make up for the decline in profits owing to a strong dollar fine. If the C.D Howe wants to back it as a means to enhance productivity I say perhaps wishful thinking but fine. If Jack Mintz wants to sell them as the start of the process to attract his companies’ books back to Canada, (disingenuous because zero is the magic number), that is fine. If the Cons want to sell this a as productivity enhancing move which takes stock of the new reality of a strong Canadian dollar with the potential of repatriating some companies from abroad fine. But as a jobs program for today?

Really.

As I said yesterday as a jobs creation it is a pig and best lipstick which can be put on the pork is that it will produce 100,000 jobs over 7 years which is 1/10th of one percent of total employment in Canada. So a drop in the proverbial bucket of what we need now not seven years down the road.

And this brings me to the concluding criticism. Prior to the GFC of 2007 was their any indication that Canada had an unemployment problem. Were not all the headlines back then about critical jobs shortages and in essence the first time we had experience something close to full employment since the mid 70s? Given this why are the Cons trying to boost the structural level of employment and not instead focussing on its cyclical component of which the trend level of investment is not the real issue.

The real issue is demand. And with demand in for a a stall as Canadians finally have begun parring back on consumption driven debt what will increased investment and a paltry 1/10th of 1 percent in employment increase over 7 years do for aggregate demand over the next crucial two years? Answer 2/7ths of 1/10th of 1 percent.

The word that springs to mind is meagre

Anyway the faith based community  from economists at the U of Laval, to Public Policy Schools in Alberta will sell it; so for all you snake oil sales people out there:

The 1/10th of 1 Percent Solution: Corprorate Tax Cuts, Investment and Jobs

Yesterday I was consumed by the demand side (Krugman and Rowe are late to the party) today I am consumed by the headline grabbing supply siders supply sider Jack the rain-maker Mintz. The FP quotes Jack Mintz quoting Jack Mintz. In his latest research paper he says that he estimated that 100,000 new jobs will be created by an increase of 30 billion in investment over 7 years owing the decrease in CITs from 16.5 to 15%.

On its own, the final cut to corporate income tax rates, from 16.5% to 15%, would result in $30-billion in additional business investment and 102,500 new jobs over a seven-year period, the paper estimates.

For the sake of argument lets just agree with Jack (how could I disagree I can’t find his paper). What he is saying is that we need an additional 30 billion in investment to create 100,000 new jobs which means that each new job created by the private sector needs 300,000 in new investment.

Notice it will take 7 years for this to happen and that it works out to roughly 14,300 jobs per year. This pretty paltry. Sure I guess every little bit helps but 14,300 jobs is less than 1 tenth of 1 % of total employment in Canada. The price tag for these cuts according to the Department of Finance over the next 7 years is wait for it…31.8 21 billion.

In effect Mintz is arguing that all of the CIT cut will go directly to new investment and generate another 10 billion which is a fairly dubious assumption to make to say the least.

Nonetheless, the best face that can be put on CIT cuts is 1/10th of 1 percent of total employment at a cost of 21 billion over 7 years. You have to ask yourself this: if the government proposed a jobs creation scheme that would not make a dent in unemployment and would cost 3 billion a year would you not be right to point out that government was extremely inefficient or generous? That is, for the price tag, the government could create 14,300 jobs a year with a funding envelope per job at over 400000 200,000$. Read that again.

The bigger point is that right now we probably could do with some heavier lifting in terms of labour market policy. Whether this should be through direct job creation (surely we can find someone in the private or public sector that can create a job for less than 200,000$ a year) or an increase in the pool of eligible workers for EI is an open question. And a much more interesting election topic than the 1/10 th of 1 percent solution currently on offer.

PS. You might also want ask yourself which service cuts or tax increases you want to pay for a worlds most costly job creation scheme.

Flaherty`s Flatulence is no Laffering Matter: The Revenge of Zombie Gas Coming to an Election Near You

I am not going to spend much time dissecting the claims made by the Finance Minister in the block quote below. Indeed over at the PEF both Erin Weir and Andrew Jackson have pointed out the myriad of ways in which the Finance minister is simply dissembling on the issue. At the heart of the matter is not an economic “law” but rather a cocktail party joke once told by a republican operative and an economist to the Ford administration.

Two things clench the deal for me. Even if we believe abstractly that there is a Laffer curve no one has shown that we are in fact on the right hand side of the dissecting line vertically running through the centre of the curve. Second as Andrew and Erin have pointed-out the Department of Finance itself does not believe it either as all their estimates say exactly the opposite: decreased corporate income taxes will lead to decreased *not* increased corporate income tax revenue. So whatever appeal the Laffer curve has to economists owing to their counter-intuitive Straussian like need to be separated from the uninitiated masses, the rather conservative chaps in the Department of Finance are not buying it. Not that that is the ultimate test of veracity, it is just that if a Conservative Finance minister can’t get one of the most conservative ministries to stump for him or his beloved curve it would seem to indicate the we are indeed dealing with a Zombie idea born out of Voodoo economics aka the supply-side school.

“There’s a false assumption there which is really dumb – that is, by reducing business taxes , we reduce business tax revenue to the Government of Canada. That’s simplistic and, in fact is wrong. If we look at the tax revenues of the Government of Canada – corporate income tax revenues – they have gone up during the time that we have been reducing the tax burden.”

Perhaps what the minister is saying is that in an economic upswing that even though the percentage of corporate income taxes as a percent of GDP will decline they will nonetheless get absolutely bigger even if their relative share is diminishing. I can imagine this happening. But so what? The real issue here is who is going to pay for the deficit. If corporate tax rates do not provide the same relative share of total income tax revenue as a percent of GDP then that shortfall will have to be made-up somewhere else. What Flaherty is really saying is that either public austerity or further increases in individual taxes either through sales or income taxes are in the cards.

Now no conservative government is going to run an election on the promise of tax increases so it is going to have to be the former. So the real stench hanging in the air from Flaherty’s emission of Zombie gas is the question as to which services are going to be cut? I do not expect the conservatives, given Flaherty’s dissembling, are going to be honest with the electorate. Rather it is going to be a cake and eat it too election campaign–more of the hear no evil; see no evil; do lots of evil–we have seen so much of in Canadian politics.

But hey it is a democracy and if the electorate wants to fall for all this hand-waving who am I to criticise?

More evidence that orthdox economic ideas and politics do not mix

Case in point: Gordon Campbell. Yep that is what Gordon following the Gordon gets.

Mankiw was right, incentives do matter

It turns out that Greg Mankiw perhaps was *mostly* right: incentives do matter. To understand to what extent and how far my dear readers you will have to do three things.

First you will have to read Mankiws original article here. Then you will have to watch this 10 minute long animated lecture here (h/t Marc Lee) and then you will have to read Iglika’s post over at the Progressive economics blog. I know that is about 30 minutes of your time dear reader but I promise you will be rewarded for doing your homework and be equipped to make a difference.

My take away from the three homework assignments is this. If we combine Iglika’s post with Marc’s video link and reflect back on Mankiw’s now infamous article in the NYT we are left with one of three conclusions.

A) Mankiw is wrong.

B) The type of intellectual work he does is akin to basic mechanical manipulation of say moving a mountain of manure from spot X to spot Y.

C) A & B are correct if, and only if, Mankiw does not generalize from what he does for work to what real professionals do for work.

Take away is that both incentives and the type of work being done matter.