Coporate tax cut: Job creator, or fatter bonus?

Will a Canadian corporate tax cut of 1.5% really create jobs? That's what the Conservative Government and a number of economists will lead you to believe. However, I'm wondering if they're relying too much on economic theory and coming up with an easy sound bite for the public to digest. Or is this just another political move for the Conservatives to finally achieve the majority that has been just out of their reach all these years?

I've had some instruction on economics, but not enough to argue this over economic theory, so I decided to look at this from a more practical standpoint. Statscan tells us that from the 2005 census data, the average Canadian worker earned $41,401. Assuming that "payroll taxes" (i.e. benefits, company contributions to CPP & EI, etc.) account for 25% (this would vary from company to company, depending on a number of factors, but let's use this as an average), that would mean a company would need a benefit of $55,201 (41,401/0.75). Consequently, for the 1.5% tax reduction, a company would have to have revenue of about $3,7M (55,201/0.015) to justify hiring an additional worker. I couldn't find the data, but I suspect many small companies would not make sufficient revenue to fall into this category, and it is often said that small companies are the economic engine of Canada.

So, where would this reduction in taxes go? Canadian Business, in their Investor 500 list, has Manulife Financial Corp as the top revenue earning public company at $34,550M. Using the revenue figure from above, that would mean Manulife could hire up to 9,337 new employees, just from this tax giveaway! Will they do it? Highly unlikely. What sane manager would hire more people just because they could? It's more likely they would give fatter bonuses to their employees, and/or increase their dividends to shareholders, which in effect, raises the stock prices, and makes the Manulife managers with stock options ever richer. Now, I'm not trying to single out Manulife for anything other than they were the top revenue earner on the list. I use them to illustrate the point that putting money in corporate pockets won't necessarily lead to jobs. But the Conservative Government would lead you to believe that this is the case. The real driver for business is to generate more sales. More sales means more production. More production means capital investment and/or the hiring of additional staff. In order to be competitive, it comes down to productivity, i.e. output per unit of input. This is especially true in labour intensive industries where low cost countries have a competitive advantage. The U.S. and Germany (both G8 countries) have significantly higher productivity rates over Canada.

The fact is that Canada already has the lowest corporate tax rate among G8 countries, and that opponents such as Jim Stanford (an economist with the Canadian Auto Workers union) have come out against lowering the corporate tax rate. Mr. Stanford points to the fact that over the past 20 years, corporate tax rates in Canada have dropped from 29% to 16.5% (much of it during a series of Liberal Governments), yet capital investment in Canada has declined.

I can't help wondering if this is a little Three Card Monty trick the Conservative Government is playing so that it appeases their Conservative base, while trying to sell it to the more middle of the road public under the general "will create jobs" banner. Given that Canada fared better than most countries during the recession, and that the economic recovery is still tenuous, with an ever-present fear of a double-dip recession, I would suggest that putting this latest corporate tax cut on the back burner for now would be a good thing for the country. Especially considering the Conservative Government is facing a $45 billion deficit in the next budget, with a quickly rising debt level.

What do you think? Contact your MP and let them know!