Do Corporate Tax Cuts Create Jobs?

Federal elections are usually less interesting from a workplace law perspective than provincial elections for the simple fact that 90% of workers are governed by provincial law in Canada. That makes workplace law a less important factor in political debates at the Federal level. But occasionally employment-related issues rise to the service in Federal campaigns. This year, that issue relates to the competing claims of politicians about the benefits and harms of corporate tax cuts on employment levels. This debate demonstrates yet again how economics is used and misused by politicians in support of political platforms, a theme I have discussed over and over again over the years.
Canada’s major newspapers have weighed in on the corporate tax debate in recent days:
Here is a Toronto Star piece.
Here is the National Post piece.
And here is a Globe and Mail piece, and another Globe column by Jeffrey Simpson.
If anything is clear from these stories, it is that there is considerable doubt among economists that corporate tax cuts create jobs or even cause employers to invest more in their Canadian operations.  Jeffrey Simpson of the Globe notes that, according to the OECD (hardly a left-wing bastion), there is no discernible  link between corporate tax rates and unemployment levels in the advanced economic countries.
So why do the Conservatives keep telling everyone that the Canadian economy will crumble unless corporations are given even more of break on taxes?
The Conservatives are promising to cut corporate tax rates even lower than the current rate of 16.5%, which is way down from 28% in 1990. The Conservatives insist that there is a direct link between a corporate tax cut and the number of jobs created, even though unlike the Liberals, they are not interested in attaching the tax cuts to actual job creation. In other words, under the Tory plan, corporations get the tax cuts even if they substantially reduce Canadian employment levels. “We will not raise taxes on growth”, said the Tory Finance Minister when asked about the benefit of continuing to cut corporate taxes year after year. Meanwhile, both the NDP and the Liberals have promised to stop the corporate tax cuts and use the increased revenues to pay for more services. Neither party accepts the Tory claims that tax cuts = job growth.
So, do corporate tax cuts increase employment?
The Tories’ claim that they do is based on the basic assumption that tax cuts give employers more cash, which will translate into more hiring. Does this make sense to you? This could happen.    If employers need more employees, but they are unable to hire more due to a lack the cash, then a tax cut could enable those hirings. Of course, many employers don’t hire more people because they don’t need more people. They prefer to have as few employees as possible to perform the work needed, so that there is more money for profits, executive pay, and shareholders. So there is no reason whatsoever to believe that tax cuts will cause employers to hire more people. There are a myriad of other things employers might do with the extra money other than hire more workers, and no reason to believe hiring is even high on that list.  The odds of a tax cut leading an employer to hire more Canadian workers is no greater than, and probably less than, the odds of that employer using the extra money to add to savings, pay higher executive bonuses, or buy a new machine for their factory in Texas or Mexico.  Moreover, there are myriad factors that influence whether employers hire more workers that are completely unrelated to tax rates, so that it is virtually impossible to “prove” a linkage between tax cuts and hiring levels.
Its possible that if Canada lowered its tax rates to almost nothing, that some companies might decide to build new factories here.  But good luck proving that tax cuts are driving all sorts of businesses to flock to Canada.  If Canada’s tax rates were WAY higher than other Western economically advanced countries’, then the tax rate could certainly be a factor in where a company invests.  But Canada is already extremely competitive in terms of international corporate tax rates, so we are only talking about making it marginally lower.  Canada already offers a significant benefit to employers through our publicly funded health care system (paid for by taxes, by the way).  In other countries employers burden health care costs themselves.  And there will always be countries with lower taxes and lower wage workers than Canada for businesses that make investment decisions based on costs.  In other words, the Conservative argument that corporate tax cuts will lead to more Canadian jobs is an argument based on faith and hope, not science or even sound economics.
The two studies referred to in the newspaper clippings suggest that in fact employers do not use money saved in tax cuts to either hire new workers or invest in new machinery or equipment. Instead, the money appears to go into savings, which do not benefit you or I at all. We know also that income inequality and poverty in Canada have been growing at alarming rates (according to the OECD) over the same period that corporate tax rates have been falling. Tax cuts are not free–we all pay for them in cuts to public services, which effects our quality of life.
So, what lesson for my students? As always, the lesson is the same: Doubt any economic argument used to justify employment-related policies. The Tory assertion that corporate tax cuts “create jobs in Canada” or “improve productivity” is a not a fact, it is an assertion only, and a highly dubious one at that when the “evidence” is reviewed.