A three-point corporate tax reduction proposed by the Conservative Party would cost $6 billion per year, but stimulate only about $600 million in new business investment annually, a study by the Canadian Centre for Policy Alternatives (CCPA) concludes.
The study, by economist Jim Stanford, examines historical data on business investment and cash flow from 1961 through 2010.
Stanford found no evidence that lower taxes have directly stimulated more investment. Moreover, the indirect impact of tax cuts on investment, as experienced through corporate cash flow, has become much weaker over time, he found.
Additionally, after adjusting for other determinants of investment spending, incremental cash flow has fostered only small amounts of business investment in recent years: about $0.10 in new investment for each dollar in extra cash flow.
“Given this statistical evidence, the federal government would have a far more powerful impact on both public and private investment by investing directly in public infrastructure, rather than providing additional tax reductions for businesses,” Stanford said.
“Corporate Canada has been consistently receiving far more after-tax cash flow than it is reinvesting in Canadian capital spending – to the tune of $745 billion since 2001. Supplementing that cash flow through further tax cuts is like pushing on a string. Those tax savings would only add to the large sums of uninvested cash Canadian businesses already possess.”