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economy lab

Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative.

The reductions in the corporate income tax (CIT) passed by the House of Commons in 2007 have become an issue again, and a significant point of contention is over whether or not CIT cuts are effective as a job-creation measure. The government is claiming that the CIT cuts will create jobs by the tens of thousands.

The opposition parties are of the opinion that CIT cuts don't have a significant effect on employment, and that other job-creating measures should be applied instead. Both claims are beside the point.

Here is the basic theory behind the CIT cuts. Lower taxes on profits generate higher returns to investment, and the higher returns induce a greater flow of savings from investors, both foreign and domestic. These new investments increase productive capacity, increasing output. Wages also increase as workers are made more productive by the new equipment. As investment increases, diminishing returns set in, bringing rates of return back down to their previous levels.

There is considerable evidence showing that lower CIT rates increase investment and output. And available evidence also shows that reducing corporate taxes increases wages. But there doesn't seem to be much evidence showing that CIT rates affect employment one way or the other. People who expect the CIT cut to have a measurable effect on employment are likely to be disappointed.

But this doesn't mean that CIT cuts aren't a good policy. In a previous Economy Lab post, I pointed out that most economic policies aren't expected to create jobs, and this is true for corporate tax policy. The arguments for a decrease in the CIT take the form of increased output and wages, not higher levels of employment. Employment is an important dimension for policy evaluation, but it is not the only one. Corporate tax policy isn't about jobs, and it is a mistake to conduct the policy debate as if it were.