Several parties currently campaigning in Quebec are promising to reduce the tax burden on businesses. Some even anticipate that the resulting loss of revenue would be partly offset by increased economic activity stemming from the tax cuts.
The Coalition avenir Québec, Quebec Liberal Party and Québec solidaire do not include “an explicit integration of the positive dynamic effects arising from their commitments,” notes the University of Sherbrooke’s Research Chair in Taxation and Public Finance (CFFP) in a summary report released Monday.
The situation is different for the Parti québécois (PQ) and the Conservative Party of Quebec (PCQ). But what exactly does this mean? When the government cuts business taxes, for example, it leads to a short-term drop in revenue, explains Dalibor Stevanovic, chairholder of the Research Chair in macroeconomics and forecasting at the Université du Québec à Montréal. That is to be expected: the tax rate goes down, but the tax base remains unchanged.
Other effects should follow over the longer term: “When you lower taxes on businesses, generally speaking, that should reduce the cost of capital and, therefore, encourage businesses to invest more.” This should lead to higher productivity and output, which in turn would boost employment, wages and corporate profits, he adds. “Those are what we call positive dynamic effects.”
In other words, the tax cut should stimulate the economy and expand the tax base. As a result, the government could generate additional revenue despite a lower tax rate.
Self-financing and asymmetric treatment
The extent of the benefits that can be expected from these indirect effects is far from a matter of consensus, Stevanovic notes. “Will these dynamic effects be strong enough for the tax cut to eventually pay for itself? That’s the question, but we don’t really have an answer.”
“We don’t have a specific model for this dynamic effect,” explains Emna Braham, president and CEO of the Institut du Québec. “When we run our simulations on the long-term growth potential of government revenues, we base them primarily on demographic trends and the types of industries found in our economy.”
In its fiscal framework, the PQ estimates the “increase in revenue resulting from the cut in corporate income taxes” at just under $1.4 billion by 2030–31.
The PCQ’s platform also relies in part on dynamic effects. For example, its pledge to lower the corporate income tax rate would cost $23.28 billion over four years, but dynamic effects would generate $5.82 billion in gains, bringing the net cost to the government to $17.46 billion.
The CFFP points out that both the PQ and the PCQ have included positive dynamic effects in their fiscal frameworks, while leaving out possible negative dynamic effects from certain measures. Yet “it would be reasonable to believe” that if a lower tax rate produces positive dynamic effects, the withdrawal of subsidies could, in turn, produce negative effects.
