NEW DEMOCRATS CONDEMN CORPORATE INCOME TAX CUTS IN FACE OF MOUNTING DEFICIT

FOR IMMEDIATE RELEASE
JUNE 5, 2009

NEW DEMOCRATS CONDEMN CORPORATE INCOME TAX CUTS IN FACE OF MOUNTING DEFICIT

OTTAWA – Today New Democrat Finance Critic Thomas Mulcair and Industry Critic Brian Masse revealed a $170 billion loss of foregone federal revenue due to the government’s implementation of steady corporate income tax cuts.

The amount of revenue that will be lost as a result of these cuts is equal to the recent TD Bank forecast of the total federal deficit over the next 5 years.

Harper has continued the corporate income tax cutting regime, first instituted by the Liberals, cutting the corporate income tax rate from 29.12% in 2000 to 22.12% in 2007 and has scheduled further cuts reducing the rate to 15% by 2012.

“How can the Prime Minister sleep at night when he’s announcing a $50 billion deficit at the same time as he’s just giving away much needed revenue?” asked Mulcair. “Hard working Canadians are making sacrifices to help pull us through this recession and yet this government is cutting slack to those who need it the least,” he added.

“It is more than a coincidence that the deficits over next few years totals almost exactly the loss of revenue by the corporate tax cuts starting in 2001 and running through 2012, it’s complete financial mismanagement,” said Masse. “It’s completely reckless, Harper is borrowing from future generations while jeopardizing our capacity to deal with present challenges,” he added.

The total foregone revenue, from 2001 to 2009 inclusive, is over $86 billion.

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For more information please contact:
Carole Saab, Press Secretary, 613-222-5997 or saabc@parl.gc.ca

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FEDERAL CORPORATE INCOME TAX REDUCTIONS
AND FOREGONE FEDERAL TAX REVENUE

The federal government reduced its general corporate income tax rate (inclusive of the recently eliminated federal corporate surtax) from 29.12% in 2000 to 22.12% in 2007. Table 1 shows the rate reduction for each calendar year over the 2001 to 2012 period, when the rate is scheduled to be 15%.

Table 1 – General Federal Corporate Income Tax Rate, 2001–2012

Calendar Year Percentage point reduction in general corporate tax rate relative to 2000 General corporate tax rate after reduction,
including federal surtax
%
2001 1.00 28.12
2002 3.00 26.12
2003 5.00 24.12
2004 7.00 22.12
2005 7.00 22.12
2006 7.00 22.12
2007 7.00 22.12
2008 9.62 19.50
2009 10.12 19.00
2010 11.12 18.00
2011 12.62 16.50
2012 14.12 15.00

Note: The federal corporate income tax rate, including surtax, was 29.12% in 2000.

Source: Data obtained from Department of Finance, 2007 Economic Statement, 30 October 2007, Annex 1, available at: http://www.fin.gc.ca/ec2007/ec/eca1-eng.asp. Table prepared by Marc André Pigeon, Parliamentary Information and Research Service, Library of Parliament.

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ESTIMATING FOREGONE FEDERAL TAX REVENUE

One way to estimate foregone federal tax revenue resulting from reductions in the general federal corporate tax rate is to multiply the decline in the rate by the Department of Finance’s estimate of the tax expenditure (foregone revenue) associated with a one percentage point reduction in the corporate income tax rate.( ) This calculation requires several assumptions, including:

a) an assumption that the decline in the general federal corporate tax rate does not affect economic activity (i.e., the underlying tax base);

b) an assumption that all tax provisions other than the reduction in corporate taxes remain unchanged;

c) an assumption that the tax expenditure figures regarding the cost of a one percentage point decline in the corporate tax rate are made on the basis of economic growth forecasts consistent with those in the Department of Finance’s 2007 Economic Statement;

d) an assumption that 2000 is a suitable reference or baseline year;

e) an assumption that the Budget 2009 estimates and forecasts for economic growth for 2008 through 2012 will be accurate;

f) an assumption that the fiscal sensitivity estimates in the Budget 2009( ) are accurate, additive and symmetrical (the positive impact of an increase in real gross domestic product (GDP) mirrors the negative impact of a decline in real GDP);

g) an assumption that the Budget 2009 fiscal sensitive estimates can be used to adjust the Department of Finance’s 2008 tax expenditures estimates for 2007 through 2012;

h) an assumption that the Department of Finance’s 2008 tax expenditure estimate for 2010 can be projected forward to 2011 and 2012, subject to the adjustment discussed in (g) above; and

i) an assumption that the federal tax expenditure associated with a one percentage point decline in the corporate tax rate for 2013 and 2014 will be related to economic growth projections for those years.

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Given these assumptions, Table 2 shows that the reduction in the general federal corporate income tax rate from 29.12% in 2000 to 15% by 2012 will have cost the federal government an estimated $171.3 billion in foregone tax revenue over the 2001 to 2012 period.

Table 2 – Estimated Foregone Federal Tax Revenue Caused by a Decline in the General Federal Corporate Income Tax Rate Using 2000 as the Baseline

Fiscal Year Column A Column B Column C
(=A x B)
Estimated federal tax expenditure associated with a 1 percentage point decline in the general federal corporate income tax rate Percentage point reduction in federal corporate tax rate relative to 2000 Estimate of foregone federal tax revenue relative to 2000 caused by decline in the general federal corporate income tax rate
(Billions of
Nominal Dollars) (Percentage Points) (Billions of
Nominal Dollars)
2001 $1,145 1 $1,145
2002 $1,065 3 $3,195
2003 $1,210 5 $6,050
2004 $1,455 7 $10,185
2005 $1,645 7 $11,515
2006 $2,045 7 $14,315
2007 $2,185 7 $15,295
2008 $1,490 9.62 $14,334
2009 $1,005 10.12 $10,171
2010 $2,120 11.12 $23,574
2011 $2,300 12.62 $29,026
2012 $2,300 14.12 $32,476
TOTAL: $171,281

Source: Data obtained from the Department of Finance Tax Expenditures and Evaluations, 2008 and 2006 versions. Table prepared by Marc-André Pigeon, Parliamentary Information and Research Service, Library of Parliament.

Choosing a baseline year other than 2000 dramatically changes the results of these calculations, as shown in Table 3, which estimates the foregone tax revenue using 2007 as the baseline year. This time frame represents the end of a four-year period during which corporate income tax rates were unchanged (see Table 1). Table 3 shows that the general federal corporate income tax reductions which came into effect in 2008 and 2009, and which are scheduled to take effect for 2010 through 2012, will cost the federal government an estimated $13.4 billion.
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Table 3 – Estimating Foregone Federal Tax Revenue Caused by Decline in General Federal Corporate Income Tax Rate Using 2007 as the Baseline

Fiscal Year Column A Column B Column C
(= A x B)
Estimated tax expenditure associated with a 1 percentage point decline in the general federal corporate income tax rate Percentage point reduction in general federal corporate tax rate relative to 2007 Estimate of foregone tax revenue relative to 2007 caused by decline in the general federal corporate income tax rate
(Billions of
Nominal Dollars) (Percentage Points) (Billions of
Nominal Dollars)
2008 $1,490 2.62 $3,904
2009 $1,005 0.5 $503
2010 $2,120 1 $2,120
2011 $2,300 1.5 $3,450
2012 $2,300 1.5 $3,450
TOTAL: $13,426

Source: Data obtained from the Department of Finance Tax Expenditures and Evaluations, 2008 and 2006 versions. Table prepared by Marc-André Pigeon, Parliamentary Information and Research Service, Library of Parliament.

IMPACT OF FOREGONE REVENUE ON BUDGET BALANCE AND FEDERAL DEBT

If the corporate income tax reductions enacted since 2001 had not been made, and assuming that the resulting additional revenue had not been spent, the federal government’s budgetary balance and accumulated deficit (the “federal debt”) would have been affected proportionately to the figures in Column C of Table 2 and Table 3.
To illustrate, consider the federal budgetary balance in fiscal year 2004–2005. Column C of Table 2 shows that the general federal corporate income tax reductions in calendar year 2004 cost the federal government $10.2 billion. Assuming that calendar years and fiscal years are identical, which they are not,( ) the budgetary balance for 2004–2005 would have been $11.7 billion instead of $1.5 billion. Similarly, the federal debt for 2004–2005 would have been $484.5 billion instead of $494.7 billion. The same calculations can be made using the data in Table 3.
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CONCLUSION

The foregone federal revenue estimates itemized above are highly contingent and sensitive to the underlying assumptions. As is the case with all fiscal estimates, changing the reference year, for example, dramatically alters these estimates, as a comparison of the data in Table 3 with Table 2 demonstrates.