Corporate Canada ‘hoarding’ cash from tax breaks: study

Corporate tax breaks designed to lure Canadian businesses into hiring employees and investing in equipment are instead fuelling higher dividends and allowing companies to “hoard” billions, says a new study.

The study, prepared by the Canadian Labour Congress and scheduled to be made public Wednesday morning, found the “leading cash hoarder” was Potash Corporation of Saskatchewan whose coffers grew by over $5 billion between 2000 and 2010.

In second place was George Weston Limited, which has accumulated $4 billion, followed by Barrick Gold Corporation with $3.9 billion. Embattled Research in Motion was in fourth place with $2.6 billion and Kinross Gold Corporation has set aside $2 billion.

“Cuts to corporate taxes have resulted in a major loss of government revenues, without the anticipated result of higher corporate investment in machinery and equipment, new plants and other areas of company operations,” wrote authors David Macdonald and Andrew Jackson. “Instead, we have seen a big increase in the divident payouts and in financial assets.”

Under successive Liberal and now Conservative governments, the corporate income tax rate has dropped from 28 per cent in 2000 to the current rate of 15 per cent, which went into effect Jan. 1. Where corporate tax freedom day used to come later in February, it now comes by Feb. 1.

Each percentage point drop has cost the federal government about $2 billion in annual revenues, says the study.

Governments have defended the tax breaks for business, saying Canada has to be competitive internationally and the money companies save in taxes will be reinvested to create jobs and increase productivity.

However, the study says that’s not what happens.

“Companies have used increased after-tax profits to boost dividends paid out to their shareholders. Dividends as a percentage of after-tax profits have risen from 30 per cent in 2000 to over 50 per cent in recent years.”

Companies are also retaining higher after-tax profits as financial assets, as cash and as longer-term assets, not counting capital stock, the authors added.

“The top 10 corporate hoarders have collectively accumulated $30.7 billion in extra short- and long-term assets between 2000 and 2010.”

And they’re not the only ones.

“According to Statistics Canada, total corporate reserves of private, non-financial corporations grew from $157 billion in the second quarter of 2001, to $477 billion in the second quarter of 2011.”

Meanwhile, Canada’s corporate tax rates are now well below those in the U.S. and are the lowest in the G7, said the study.

The authors say that lower corporate taxes are only one factor in the decision to invest and pale in comparison to the attraction of high rates of return. If there are potential profits to be had, companies will still invest, they argue.

“This is the case today with much of the energy and minerals sector. Corporate tax cuts simply divert the benefits of high resource prices from citizens to corporate shareholders (half of whom live outside Canada). The cost is cuts to services or higher taxes for ordinary Canadians.”

The report concludes that government revenues have dropped as a result of corporate tax cuts without the benefits it anticipated of a stronger and more productive economy.

“The winners have been those who own company shares, notably Canada’s highly paid CEOs and other members of the top one per cent. It is time for corporate Canada to take its share of the blame for capital underinvestment. It is also high time for Canada’s most profitable companies to pay their fair share of taxes.”

Original Article
Source: iPolitics 
Author: Elizabeth Thompson