The Laffer Curve Laughs All The Way To The Bank For Corporate Canada

Frances Russell

Corporate Canada reached a milestone in 2014. For the first time ever, it now has more cash on hand than Canada’s entire national debt – $630 billion and counting.

In other words, Canada’s big corporations could pay off Canada’s entire national debt in one fell swoop with just the cash sitting in their collective bank accounts. And they wouldn’t even have to touch their other assets.

The milestone is being noted by the Progressive Economics Forum, an informal group that regularly posts progressive economic ideas and news on the web. They include David Macdonald, a senior economist with the Canadian Centre for Policy Alternatives; Toby Sanger, chief economist for the Canadian Union of Public Employees, and Erin Weir, chief economist with the United Steelworkers.

Corporate cash hoarding really ramped up as corporate tax rates were slashed in half, from 31 per cent in 1997 to 16 per cent today.

Back in the 1990s, Corporate Canada said it would use the new money to build more factories, employ more workers and make Canada more productive.

“Governments dutifully cut social programs as taxes decreased,” Macdonald says. “But Corporate Canada passed on making Canada’s economy more productive….(And) Canadians are left with weaker health care, veterans care and other social programs.”

Little wonder the Conservative government has sicced its auditors on the CCPA. And a year later, they’re still there, verifying the CCPA’s right to charitable tax exemption status after a year of searching through every nook and cranny of the organization’s books. The CCPA has given them their own room in the organization’s Ottawa offices.

Prime Minister Stephen Harper is a believer in supply-side economics. Supply-side economics was first promulgated by economist Arthur Laffer. It claims that low tax rates pay for themselves by increasing economic activity and raising more tax revenues overall.

The term “Laffer curve” was reportedly coined by Wall Street Journal writer Jude Wanniski at a 1974 dinner meeting at the Two Continents Restaurant in the Washington Hotel. The gathering included Arthur Laffer, Dick Cheney and Donald Rumsfeld, according to Wikipedia.

To illustrate his opposition to then-President Gerald Ford’s tax increase, Laffer reportedly sketched his economic curve on a napkin to demonstrate the concept. “I used the so-called Laffer Curve all the time in my classes and with anyone else who would listen to me,” Laffer has since insisted.

Laffer himself does not claim to have invented the idea, attributing it to 14th-century Arab scholar Ibn Khaldun and, more recently, to John Maynard Keynes.

Corporate hoarding on today’s scale is relatively new, Macdonald says. “The real ramp-up in terms of those holdings really started in the early 2000s when they started piling up cash in their bank accounts and that coincided roughly with big cuts in income tax rates.”

This, says Macdonald, is the exact opposite of what is supposed to happen when taxes are cut. Lower taxes are supposed to encourage business investment or growth. But not anymore, apparently. In today’s economy, it simply means hording.

“The promise of corporate tax cuts is that you give them (the corporations) more money they’ll use it to invest in workers, build more factories, create more jobs,” Macdonald said in an interview. “Turns out this is not what actually happened. What actually happened is they just put it in their bank accounts and they’re waiting for another day, I guess.”

Macdonald says what’s behind the whole development is the neo-conservative victory in the U.S., Canada and the United Kingdom in the 1980s.

“Margaret Thatcher, Ronald Reagan and Brian Mulroney here kicked off this push for lower corporate tax rates with the idea we give corporations greater tax breaks and they will spend more money in the economy. But it turns out if you don’t give them any incentive to spend the money in the economy, they will just keep it and say OK, thanks very much.

“I don’t know that anyone is particularly concerned about it. Certainly the federal government isn’t particularly concerned about it. The way you whittle it back down is to raise rates and force them to use that money to do something.”

Macdonald has noticed another unusual development. “There is a connection between corporate hoarding and corporate hoarding in foreign dollars. The foreign dollar holdings are roughly in line with the increase of hoarding in the big tax havens. What I suspect is the corporate world is squirreling money away in tax havens outside of Canada because their accountants say they can do it – just check that box and don’t pay any tax at all and move the money to Barbados or the Bahamas. Once they want to bring it back, of course, they then have to invest it in jobs and pay those taxes.”

Steelworkers economist Erin Weir says the corporate sector’s aggressive accumulation of cash “helps to explain the lack of investment and employment growth. It also strengthens the case for reversing corporate tax cuts to fund needed investments in public services and infrastructure. If Corporate Canada will not invest its dead money, the government should resuscitate some of it.”

CUPE economist Toby Sanger singled out a recent quote from the prime minister boasting that “dropping our tax rate has not caused the government’s corporate income tax revenues to fall, which indicates that it does in fact attract business.”

Sanger notes that “no one seems to have questioned (Harper’s) statement, even though it was made on the same day Canada dropped to 15th place on the World Economic Forum’s index of global competitiveness from ninth in 2009.

“These rankings show corporate tax rates bearing little relationship to global competitiveness.”

The embrace of Laffer’s Curve is obviously no laughing matter for national economies.

Frances Russell was born in Winnipeg and graduated from the University of Manitoba with a Bachelor of Arts degree in history and political science. A journalist since 1962, she has covered and commented on politics in Manitoba, Ontario, B.C. and Ottawa, working for The Winnipeg Tribune, United Press International, The Globe and Mail, The Vancouver Sun and The Winnipeg Free Press as well as freelanced for The Toronto Star, The Edmonton Journal, CBC Radio and TV and Time Magazine.

She is the author of two award-winning books on Manitoba history: Mistehay Sakahegan – The Great Lake: The Beauty and the Treachery of Lake Winnipeg and The Canadian Crucible – Manitoba’s Role in Canada’s Great Divide. Both won the Manitoba Historical Society Award for popular history.

She is married with one son and two grandsons and lives in Winnipeg.