Saturday, February 16, 2008

continuing with tax relief for Albertans

To return, then, to the details of the corporate tax issue, Andrew Jackson, who is on the staff of the Canadian Labour Congress, is a blogger I've found who opposes corporate tax cuts.

Unfortunately, Jackson does not address Mintz' contention that there is reason to believe a cut in the corporate rate will increase tax revenues. His target is instead the Department of Finance and its estimate of the revenue impact of the reduction in the corporate rate announced October 30. First of all, I have to complement the blogger for his audacity in challenging the collective wisdom of Finance Canada economists. I learned a number of things while working at Finance Canada and one of them was to not question the forecasting team! But no one is infallible so let's hear Mr Jackson out. One of his contentions is that the particular data he is looking at does not support the argument that corporations invest more when their rates are cut:

If corporate Canada were investing heavily, as we have been told they would do when given rate cuts, corporate tax collections would be much lower than they are today because deferred taxes would be accumulating. (Companies accumulate deferred taxes because the cost of new equipment is written off before profits are earned on the investments.)

This is not correct; if the level of deferred taxes is related to the level of investment, the author here needs to provide some empirical evidence because it certainly does not follow logically. A company accumulates a deferred tax liability when its D&A (depreciation and amortization) expense for accounting purposes is less than its CCA (capital cost allowance) deduction for tax purposes. The difference means the firm reported less taxable profit to the tax authorities than to the rest of the world in a given accounting period.

If a company's booked D&A expense is greater than the CCA it deducted, then the opposite is true and the firm accumulates a deferred tax asset. It's paying more in taxes today but should pay less in the future when it can no longer deduct D&A for accounting purposes but can still deduct CCA for tax purposes.

Jackson does not make it clear whether he is talking about deferred tax assets or deferred tax liablities being created. But it doesn't matter. Either way, these things are simply due to differences between government and accounting depreciation schedules, and there is no logical relation between the creation of these things and and the level of business investment, since there is no reason why any given investment has to move a given deferred tax asset or liability yet further in the direction its going as opposed to reversing it.

Now I'm sure you didn't find this post very exhilarting or inspirational. But I suppose that's my point: effective public policy work is not a function of how inspirational one is. It's a rather a function of how willing one is to address the details.

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