What a $3-Billion Tax Cut Would Really Cost

Investing in health care or affordable housing can benefit the economy more than corporate tax breaks.

In the English-language debate in this federal election, Conservative Leader Stephen Harper defended his position in favour of corporate tax cuts – citing tax policy specialist Jack Mintz to claim that lowering the corporate tax rate from 16.5 per cent to 15 per cent will generate 100,000 new jobs and $30 billion in new business investment after seven years.

Harper, of course, is being selective in his sources. Jim Stanford, in a study for the Canadian Centre for Policy Alternatives (CCPA), estimates the tax cut will result in only $600 million annually in new investments. Recent studies by The Globe and Mail and the CCPA have also shown that over the past few decades, repeated corporate tax cuts have not led to increased business investment.

But let’s take Mintz – and Harper – at his word. Let’s assume that the cut in corporate taxes will result in 100,000 new jobs and $30 billion in new investments after seven years. Does that mean it’s worth it?

The Department of Finance estimates that the tax cut will result in $3 billion less in revenue annually. That is essentially the same as spending $3 billion on something else. So we have $3 billion to spend on anything we want: reducing poverty, providing child care, building new public infrastructure, and funding higher education. Are corporate tax cuts the best option for this $3 billion?

A 2008 study by Informetrica Limited projected that $1 billion invested in municipal infrastructure would more than double the number of jobs when compared to $1 billion invested in tax cuts. Investing $1 billion in social infrastructure such as health care creates even more jobs.

The Department of Finance’s own calculations demonstrate a similar pattern. According to the department’s estimates in the sixth Economic Action Plan Report, $1 billion invested in infrastructure will boost gross domestic product by $1.6 billion, and $1 billion devoted to assisting low-income Canadians will increase GDP by $1.7 billion. But $1 billion in corporate income tax reductions will raise GDP by only $300 million.

On the Progressive Economics Forum blog, Stanford considers the Department of Finance’s numbers and calculates that the GDP impact of these investments will have outcomes on job creation very similar to the effect projected by Informetrica.

So what do these various calculations mean practically for our options in spending our $3 billion?

Health care is at the top of the list for issues many Canadians worry about. If we invested $3 billion in health care, we could create more than 54,000 jobs, while the effect on GDP would be in the range of $4.8 billion. We would also have improvements in health care, such as possible reductions in wait times, more family doctors, and more access to specialized equipment.

Canada currently has an affordable-housing emergency, as identified by the United Nations Special Rapporteur on Housing. Investing $3 billion in affordable housing could result in more than 47,000 new jobs and a $4.5-billion increase in GDP. Many of the 1.5 million Canadian households in core housing need (with housing that does not meet standards of adequacy, affordability, and suitability) would also have access to safer, more appropriate, and more affordable housing.

More than one in 10 Canadians live in poverty. In 2008, the poverty gap – the amount of money needed to bring everyone in Canada up to the poverty line – was $13.1 billion. If the $3 billion were transferred directly to low-income Canadians through the tax system as a guaranteed annual income, it could generate nearly 56,000 new jobs and a $5.1-billion increase in GDP. It would also reduce poverty by nearly 25 per cent, bringing new-found dignity and security to the lives of many who struggle with the day-to-day challenges of putting food on the table and paying the rent.

Now it is true that the Finance Department, like Jack Mintz, suggests that the benefits of corporate tax cuts will kick in over the long term. But remember, tax cuts happen annually. So this $3 billion investment is not a one-time thing – we are choosing where to invest our $3 billion every year. So while we are waiting for our 100,000 jobs to materialize from business tax cuts at the end of seven years, we could have invested $21 billion in physical or social infrastructure.

So the choice is ours: Do we want to spend our $3 billion every year on corporate tax cuts or do we want to spend our $3 billion every year investing in the health, well-being, and future of all Canadians? Both will create jobs. Both will generate economic growth. Both represent an opportunity cost. But is the investment in corporate tax cuts worth the loss of investing in health care, housing, poverty reduction, and other social priorities? The evidence suggests it’s not.

Photo courtesy of Reuters.