Corportate Taxes and Yummy Cake

Further to my column this week on corporate tax cuts, David Campanella from the Parkland Institute responds in the letters pages of the Calgary Herald to argue for higher corporate tax rates:

Rob Breakenridge would like to have his cake and eat it, too - corporate tax  cuts and higher revenues. Conservatives love promoting corporate tax cuts  because it enriches their corporate friends and means less money to support a  generous welfare state. The latter isn't popular, so is generally left out of  the talking points. Fantastically, Breakenridge attempts to sever this connection by suggesting that corporate tax reductions have led to an increase in corporate income tax payments. If only life were so grand!
Breakenridge's argument rests on a grand misrepresentation of the  evidence.
In absolute terms, corporate income tax in Alberta did increase between 2001  (when the rate was reduced) and 2008. What else happened during that period,  which Breaken-ridge neglects to mention? A massive oil boom. Is it any wonder  revenue from corporate taxes increased when you consider that corporate profits  were skyrocketing?
The same dynamic played out at the federal level. During a period of solid  GDP growth, corporate profits more than doubled between 2001 and 2007, yet  revenue from corporate income tax increased by less than a third. The real  question is how much revenue have we forgone over the last decade as a result of  the declining corporate tax rate?
While Breakenridge would like to claim corporate tax cuts have been a major  success story, this political decision has undoubtedly cost Canadians billions  of dollars in lost revenue. Breakenridge can keep his cake.

Well, first of all, as I stated in my column: "It would be simplistic to claim that revenues will automatically rise with a reduction in the corporate tax rate".
Secondly, Campanella seems to be guilty of the "anthropomorphizing" that I spoke of in my column. Corporations are not people; they are certainly not "friends" with anyone. Whatever "corporate friends" conservatives might have, those people pay income taxes. If Campanella wishes for them to pay more, then he should look to other forms of taxation. In any event, those "corporate friends" won't be the ones paying for higher corporate tax rates.
Campanella also overlooks the costs of raising corporate taxes, and the overall benefits dervived from lower rates, beyond the revenue equation. Higher wages, productivity, and employment are all associated with lower rates. Those benefit not the "corporate friends" of conservatives, but all workers. As economics Ben Dahlby and Ergete Federe note (PDF):

Our results imply that there would have been significant welfare gains in 2011 from reductions in provincial corporate income tax rates with a revenue neutral increase in personal income tax or the introduction of a provincial sales tax. The implication of our results is that the cost of raising revenue is the highest when provincial governments use corporate income tax and the lowest when they use sales taxes.

Campanella is therefore assuming a connection between rates and revenues that simply does not exist. Higher rates might lead to an increase in revenues, but people like Campanella are guilty of "static analysis" - assuming that higher rates can be implemented without any broader effect.
Economists Jack Mintz and Duanjie Chen expand on this point in their 2012 Global Tax Competitiveness study (PDF):

...what is typically ignored is the impact of rate changes on the incentive for corporations to shift profits into and out of jurisdictions. Profit-shifting is much more responsive in the short-term, since financial and transfer pricing practices are fairly easy to change without making costly alterations to production or investment decisions.
(...)
Three Canadian studies suggest substantial corporate tax-base sensitivity to statutory corporate tax rate changes. Jog and Tang find quite large reductions in debt financing for Canadian multinationals when corporate income tax rates decline. Mintz and Smart estimate that a point reduction in the provincial statutory tax rate increases the corporate tax base by 4.9 percent for large corporations that do not allocate income across provinces, and 2.3 percent for those that allocate corporate income. Dahlby and Ferede estimate that a one-point increase in the federal-combined corporate tax rate reduces the tax base by 2.3 percent in the short run.16 Federal and provincial governments have been reducing corporate income tax rates since 2000 (when the combined federal-provincial corporate rate was over 42 percent) to a combined federal-provincial corporate rate of 26.1 percent in 2012. From 2000 to 2010, the period for which complete financial and taxation statistics for enterprises are available, the statutory tax rate has fallen from 42.4 percent to 29.4 percent (i.e., by over 25 percent).
Yet, given the severity of the 2009 recession on corporate profits, as well as the effect of ongoing rate reductions, we have not seen a significant reduction in corporate taxes as a share of GDP, which is consistent with the implications of profit-shifting studies. A counter argument was that corporate profit as a share of GDP has been up over the past decade, mainly owing to advances in technology and globalization that raised the return to capital, compared to the compensation for labour, around the world. Our analysis shows that, while net profit as a share of GDP in Canada fluctuated along with the economic cycle, taxable income, as a share of GDP, has been steadily trending upward even in recent recessionary years.

So while Campanella speaks of the "boom years" in the energy sector (an oversimplification of the first decade of this century), he neglects to mention the more recent recessionary years, which, as Mintz & Chen explain, offer compelling evidence as to the negative effects of higher corportate tax rates.
Campanella's belief that the provinces (those that reduced their rates) and the federal government are forsaking corporate tax revenue that is harmlessly there for the taken is premised on a counterfactual not supported by the evidence.
To quote me, Canada’s corporate tax reductions have been a major success story.