According to Neil Reynolds of the Globe & Mail “when it comes to setting corporate tax rates, you get to choose between expansive revenue with lower rates or restrained revenue with higher rates.”
Canada’s Conservative Finance Minister, Jim Flaherty, has brought his country’s corporate tax rate down from 21% to 16.5% over the past six years, with a final cut scheduled, bringing the rate down to 15%. With the rhetoric on the Left about “corporate giveaways,” you would not be blamed for thinking that Minister Flahrety’s rate reductions were an irresponsible reduction of government revenues, especially during a recession.
The facts paint a very different story. Corporate tax revenues are higher today than when Minister Flaherty began slashing rates. In 2002, with the old rates intact, revenue from corporate taxes was $24.2 billion; 2003, $22.2 billion; 2004, $27.4 billion; 2005, $29.9 billion. In 2010 corporate tax revenues were $30.3 billion, equaling the average of the past nine years. Additionally, corporate tax revenues provided 13.9% of government income in 2010, compared to the past decade’s average of 12.6%.
This should not come as a surprise. The argument over tax rates and tax revenues has been settled. To a point, lower tax rates result in higher revenues, whereas higher rates result in lower revenues. The static modeling used by many economists is premised upon “ceteris paribus” – with all other things being equal. Static modeling is constantly used to justify claims that tax rate reductions will result in lower government revenues. In reality, all other things are never equal.
In a dynamic economy, all events are interrelated, and changes in one secotr can, and usually do, effect all other sectors. Therefore, when tax rates are raised the government consumes capital that could have been invested in a business that could create more jobs. A more profitable business, with higher earnings and more employees results in larger tax revenues. Additionally, lower tax rates act as a disincentive to sheltering capital. When tax rates are lower, people conclude that it is more sensible to invest in a thriving economy, increase their capital, and thus pay more in taxes. Conversely, when tax rates are increased, less money is spent in the private sector, money becomes idle, and tax revenues decrease.
The evidence of the success of tax cuts is overwhelming. The numbers on income taxes are irrefutable. From a research paper I wrote on the flat tax:
In 1921, before the Harding-Coolidge tax cuts the top income tax rate was over 70% , while government revenue was $700million and the federal government’s real revenue growth rate was -9.2%. Following the tax cuts, the top marginal rate was reduced to 25% , resulting in the government revenue growth rate rising to 0.1% and government revenue to $1.2 billion . In 1961 the top marginal income tax rate was over 90%, while government revenue was $90billion with a revenue growth rate of 2.1%. Following the Kennedy tax cuts, the top marginal rate was reduced to 35%, government revenue boosted to $155 billion and the growth rate had gone up to 9% . In 1980 the top marginal rate was 70%, government revenue was $550 billion with a growth rate of -2.8%. President Reagan cut the top marginal rate to 28%. The result was an increase in government revenue to $1.4 trillion , with the growth of government revenue rate rising 6.4%, up to 3.6%.
Results were similar under President Clinton when capital gains tax rates were reduced. Revenues and the rate of revenue growth increase dramatically when tax rates are cut.
Canada’s reduction of corporate tax rates will attract more business to Canada, which can now boast of having the lowest corporate tax rate in the G7. The corporate tax rate reduction in Canada is yet another tax cut success story.