Tuesday, August 14, 2007

On productive discussions

Progressive commentators have been ready and able to debunk the right-wing claim that Canada's productivity issues can (and can only) be solved through yet another round of corporate tax cuts. But the National Post reports that one of Canada's most prominent economists is equally of the view that tax cuts, along with other seemingly favourable conditions, haven't done a thing to encourage corporate investment:
An influential Bay Street economist said Tuesday that corporate Canada is partly to blame for the country's dismal productivity record because companies have failed to take advantage of prosperous times to invest in machinery, training and technology.

Don Drummond, chief economist of Toronto-Dominion Bank, said the investment climate - with low interest rates, reduced corporate taxes and a Canadian dollar close to par with its U.S. counterpart - has never been better for companies to invest in the machinery and equipment needed to boost productivity growth.

"The short message is ... Canada is not keeping up," Mr. Drummond said in his report. "The performance of Canadian firms in fostering new investment is not impressive."...

nvestment in machinery and equipment, an important driver in boosting productivity, has also been lacklustre in Canada. As a share of profit, investment in machinery was at an all-time low in 2006, "suggesting that the high level of profits has deterred firms from pushing for productivity growth because the bottom line is already well padded," Mr. Drummond wrote.

High corporate taxes have always been cited as a main reason for companies failing to invest more in productivity-enhancing measures. But Mr. Drummond said the tax regime has had little effect on the corporate sector's after-tax profitability.

The current comparable rates of taxation, between Canada and the United States, suggest that "the corporate tax system can't be blamed for Canada's investment shortfall," the economist said.
Of course, facts have seldom stopped corporate apologists from insisting that the next round of tax cuts will be the one to suddenly spring corporate Canada into action.

But while corporations themselves may have a vested interest in ignoring reality to push for even more breaks, Drummond's report offers yet another important indication that nobody else's interests would be served by more corporate giveaways. And with Canada's lack of corporate reinvestment apparently violating the theoretical expectations which usually underlie the argument for government inaction, there's all the more reason to think that real capital investment and productivity gains will only be reached if Canada's federal and provincial governments are willing to act for themselves to create real incentives for productivity growth.

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