So, do lower corporate taxes actually lead to more jobs or better quality of life?

I was having a debate on Twitter recently about corporate tax.  You probably know by now I believe in higher corporate tax rates.  My debate partner’s arguments generally went: lower corporate tax rates = more jobs because every place is competing with its neighbours, other countries, and other provinces.  If a company could equally do business in any jurisdiction, it will choose the one that lets it keep more after-tax profits.

My arguments were three-fold: first and foremost I don’t think a country has to be a tax haven to attract investors – countries can attract business with human capital, resources, innovation, etc and low taxes are a really bad reason to draw businesses.  Second, I’m not entirely convinced that lower tax rates mean more jobs – in theory it could attract ‘new’ business to the country/province, but existing businesses will not hire more people just because they’re saving taxes (in fact, economically speaking this should have an opposite impact, because a lower income tax rate means hiring an employee costs more – with a 15% tax rate a $100,000 employee costs a company $85,000 after deducting their salary from the company’s income, with a 10% tax rate it costs the company $90,000).  Finally, and most important, is the quality of jobs – are they making people (like, real human people, not companies) happier, healthier, or wealthier?  I’m sceptical.

So I decided to run some figures. This is totally unscientific but I’ve taken all my data from the OECD.  This of course, then, excludes a lot of undeveloped nations, but I’ve only ever lived in developed nations and it’s only in developed nations I ever really have these debates so I think it applies.

I tried to incorporate a number of specific OECD measures like GDP and so on, but it was difficult to get them on the same chart without all sorts of fun in Excel, so I went to the OECD’s newly-released Better Life Index. Basically, it takes a bunch of measures of welfare and converts them to measures out of ten. I then did the same with corporate tax rates (the highest, conveniently, is just under 40% so I just divided by 40 and multiplied by 10).  Plotting everything on one graph made for a glorious mess, so I sorted the data by corporate tax rate (so that it always shows country data from lowest to highest corporate tax), and compared this to singular measures.  If there were to be any correlation between corporate tax rate and these various measures, then, we would assume the lines would go in the same direction or in the exact opposite direction.  Note that on the OECD’s Index, higher is always better – so a 10/10 on air pollution means very little air pollution.

The results were sort of interesting, though mostly showed very little correlation at all.

First – household financial wealth and household disposable income.

What does this show? Basically, higher corporate taxes don’t necessarily make us less wealthy.  If anything, there appears to be a trend to the opposite – higher corporate taxes seem to tend towards higher incomes, but there are so many exceptions that’s likely not a solid conclusion. I wish I could remember how to do regression analysis – I haven’t looked at that sort of thing since my uni stats course!  Luckily Excel does have an add-in that lets you add a linear trendline – i.e., a line that shows the trending of the data on an average sort of basis.  Using this, we get this chart:

What does this suggest? Higher corporate taxes correlate better with higher household wealth than lower ones.  That’s not to say there’s a causation – correlation does not necessarily mean causation – but it also suggests that claims that lower corporate taxes lead to higher income are also not sound.

Okay, so low corporate taxes don’t, necessarily, make us richer.  But do they give us more jobs?

Hmm. Nope.

What about air pollution?

Yet again higher corporate taxes trend in the same direction as better air pollution levels, and yet again there’s very little actual correlation.

Health?

More of the same.

What about work-life balance?

This one’s so all over the map there’s not even a trend.

But, surely, people who live in low corporate tax countries must have higher life satisfaction?

Nope! But just look at that linear trendline!!

Alright, fine, I could go on but I won’t. One last graph from the Better Life Index though – I took the average score across all categories by country and plotted it on the corporate tax rate chart.

And still more of the same.

One last chart, this time taking employment to (working age) population ratio – this is a better measure of employment in my view since it includes all people who are of age to work, and not just people actively seeking employment (which is judgmentally defined and often based on government policy).  I converted the rate out of 100% to a rate out of 10 to fit them on the same axis, and again got this (note: some countries are excluded due to lack of data – ignore the asterisks as they pertain to notes about the countries from the data set I used): (source)

And still, no real correlation.

What does all this time I spent producing graphs that show no real correlation show?  Nothing.  Which is kind of my point.  In all of these graphs, there is no obvious correlation between low corporate taxes and better quality of life for the residents of that nation.  In some of the graphs, there is a slight correlation between high corporate taxes and better quality of life – but this correlation is relatively weak given the amount of outliers to the trend line.  I’m sure someone’s already done some sort of academic paper either proving or disproving this, but this exercise was mostly to prove it to myself.

Maybe income taxes, unlike consumption taxes, really don’t serve much purpose other than revenue generation for the government.  So why cut the government’s revenues needlessly?  Or why make individuals pay for the taxes when the business can?

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2 responses to this post.

  1. Some interesting further reading: lower corporate taxes also don’t yield higher rates of investment (which basic management accounting would have told you anyway, but here’s some more evidence). http://www.progressive-economics.ca/2012/01/23/ontario-corporate-tax-investment/

    Reply

  2. Even far more relevant further reading: someone who actually knows what they’re doing has essentially concluded the same thing as me: http://www.theatlantic.com/business/archive/2012/09/tax-cuts-dont-lead-to-economic-growth-a-new-65-year-study-finds/262438/

    Reply

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