Thursday, April 07, 2011

Sachs on corporate tax cuts

Here is some more context on the corporate tax cut argument featuring prominently in the federal election campaign. Leading economist Jeffrey Sachs speaks about the "race to the bottom" going on in the G20 with corporate tax cuts and the negative sum game he says is resulting from this "tax arms race":
Mike Johnson: And you have expressed your irritation that all this is happening at the very time when governments in some countries like Britain and Canada are cutting taxes on big corporations in order to try to get some growth and to generate jobs in the future. But surely that is the point, I mean those governments would say that with the economic growth so hard to come by in many places, it is private enterprise that can lead the way, especially when it comes to job creation. And cutting taxes on big business will help that happen.

Jeffrey Sachs: Of course, all of our countries are caught in what you could call a kind of tax arms race or what could be called a race to the bottom in fact, which is that each country is trying to get the tax rate lower than the neighbours or the competitors. The result is that everybody is cutting corporate tax rates around the board.

It is only causing fiscal crisis everywhere and it's a kind of negative sum game, meaning that when both sides do it, neither gains the advantage relative to the other. In fact both lose by adding to the fiscal pressures and the need to then cut the education spending or the social expenditures that are crucial for making sure that the poor half of our societies can also participate and be productive members of our economies in the future.

Mike Johnson: But if you follow the logic of your argument, you would say to a country like Ireland, you got to increase taxes on business in order to help ease the pain on the less well-off, and surely that would lead to a flight of businesses out of Ireland, would it not, which would be the very last thing that Ireland needs right now?

Jeffrey Sachs: I think the first thing is that Ireland did itself no favour getting businesses in on the basis of providing a tax haven. We see the result when you don't build a solid economy.

So you sure can make a little bubble in the short term, but it's not really building the long-term platform for prosperity.

Second, I wouldn't say it to Ireland alone, I would say to the European Union, the United States, Japan, other high income countries, indeed in the G20 as a whole. Let's stop this horrendous process where we are being gamed by global companies that are playing off our governments, one against the other and ending up by depriving ourselves of the productive base of our societies which after all are our skilled and educated work forces.

When we are cutting back on college education, when we are slashing health care for the poor, when nutrition standards are going down, when community programmes are being cut, all of those things are happening in the United States right now. How can one ever presume that we can remain a highly competitive high income country?

We are just giving up on the bottom. It's not just the bottom, it's the bottom half of the population and it's for the sake of the richest one per cent.
Well said. Puts Flaherty's comment yesterday in that Globe analysis about cutting the corporate tax rate as being "a way of branding Canada” in a very different perspective.