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Data suggests Flaherty wrong that cutting corporate taxes raises revenue

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OTTAWA - As the Conservatives sell their latest budgetary plan at home and abroad, Finance Minister Jim Flaherty is touting the benefits of five consecutive years of corporate tax cuts on the government's bottom line.

Flaherty told reporters in New York and Edmonton this week that government revenues from corporations continue to rise even as Ottawa cuts taxes.

"What we're seeing, despite the fact that we've reduced business taxes, is we're seeing our corporate tax revenue continue to rise. And this is further proof, if anyone needed it, that reduction of taxation creates more economic activity, more investment, more jobs," Flaherty said in Edmonton on Thursday.

But the numbers to date don't bear out Flaherty's assertion.

Ottawa collected $40.6 billion in taxes from firms during the 2007-08 fiscal year, a record high. It was also the year the Harper government began a schedule of tax cuts that saw the federal rate fall from about 22.1 per cent to the current 15 per cent.

With the onset of the recession and cut to the tax rate, revenues have yet to recover, even in non-inflation adjusted dollars. The three years following 2007-08 saw corporate tax revenues fall to $29.5 billion, $30.4 billion and $29.9 billion.

By the government's projections in this spring's budget, corporate tax revenues will start to inch up but won't approach the $40-billion mark again until 2016-17, a full nine years later and without adjusting for inflation.

What has returned to pre-slump levels, and even more, is the amount of cash corporations are holding — about $250 billion more than in 2006.

Economist Jim Stanford of the Canadian Auto Workers says Flaherty is repeating the disproved Laffer curve argument popularized by President Ronald Reagan in the 1980s, that governments can raise revenues by cutting taxes.

"It's absolute statistical nonsense," he said. "The end result has been on one side a reduction in government revenue and on the other side, an additional increase in corporate cash hoarding."

Stanford does acknowledge that the tax cuts were not primarily responsible for the plunge in corporate tax revenues starting in 2009. He said the recession was the primary reason, but added without the cuts corporate tax revenues would be about $7.5 billion higher today.

Economist Jack Mintz, a respected expert on tax policy, said his research and others suggests that to maximize revenues, the effective corporate income tax rate should be somewhere between 26 and 28 per cent. With provincial rates included, it is at about 27 per cent today in Canada.

He argues that, discounting fluctuations for both booms and busts in the economy, corporate taxes as a share of the economy have not fallen or risen appreciably since 2000, even though the combined federal-provincial corporate rate was cut from 43 per cent to 27 per cent during the period.

"Why? Because multinationals are taking profits out of high tax countries like the U.S. and shifting into Canada," said Mintz, a professor of economics at the University of Calgary.

"We were on the wrong side of the Laffer curve — cutting the rate increased revenues, keeping all other factors constant."

According to Finance, even by that measure, revenues from firms have not risen as taxes have fallen, although the fall off in revenue is not as severe as the dollar figures suggest.

The data shows revenues increased from about 2.3 per cent of GDP in the late 1990s and early 2000s, to a high of 2.7 per cent in 2006-07 during the boom. When the recession hit, corporate tax revenues fell to a low of 1.8 per cent both in 2008-09 and 2010-11, the last year for which there is data.

When asked about the revenue picture to date, Flaherty's director of communications, Chisholm Pothier, said corporate tax revenues will increase going forward.

"We're leaving more money in the hands of entrepreneurs. This has made Canada the best place in the world to do business according to Forbes magazine," he said in an email response.

"Lower taxes make our economy stronger and create good, long-term jobs. What's more, corporate tax revenues will — as noted (in) Budget 2012 — increase by over 30 per cent between 2010-11 and 2016-17, even though we have reduced business taxes to 15 per cent."

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