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Doug Saunders

Abolish corporate tax - it has been a worldwide failure Add to ...

The moment I first suspected that the U.S. economy had become a mathematical impossibility occurred almost 10 years ago, when, as a California taxpayer, I received a second cheque in the mail.

The first had refunded all but a few hundred dollars of my income tax: Thanks to president George W. Bush's tax cuts and existing loopholes, many full-time employed folks like me paid almost nothing. The second cheque, sent from Mr. Bush's campaign hub of Austin, Tex., and bearing his name on the attached letter, was his signature rebate, delivered to every single taxpayer. It was for about $700.

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This three-figure gift had a few consequences. First, it pretty much guaranteed Mr. Bush's 2004 re-election. Second, it was part of a big tax cut that sent government debt spiralling - and most of that debt went into consumer spending, causing a vast outflow of dollars to China in exchange for even more private and public debt. And third, it meant that an even larger burden of taxation fell not on individuals but on corporations, which face a U.S. tax rate of 35 per cent, one of the highest in the world.

But corporate tax, by its nature, has a reverse Robin Hood effect: It is regressive. Big corporations have no trouble avoiding it. They can do any number of things, including acquiring other companies or shifting profits to overseas divisions, that make their balance sheets legally register zero profit. So small- and medium-sized businesses end up paying the full burden - a situation that chokes off entrepreneurship, reduces competitiveness and damages economic growth. This proved to be a toxic recipe. By burdening small family businesses with a greater share of taxes and thus wounding domestic production while sending well-off individuals on an import-heavy spending spree, Washington created a debt crisis.

On Wednesday, this finally seemed to have registered with President Barack Obama as he delivered a blistering speech on tax hypocrisy. He asked Congress to reverse his earlier decision to extend Mr. Bush's ridiculous non-taxation of well-paid Americans. But equally importantly, he realized that something is deeply wrong with corporate tax. He talked about ending the most egregious loopholes that allow big companies to escape it. And he talked about lowering its rate.

He should have talked about abolishing it. So should Canadian and European leaders. The taxation of corporations as if they were individuals has become a worldwide failure. The U.S. crisis offers only the most cartoonishly exaggerated illustration of the problem.

Corporate tax has become the great divider in the years after the 2008 crisis - a universal source of rage and exasperation, of inequality within countries and unfair competition between them. In London this year, I've witnessed riots against huge chain stores that have managed (legally) to pay zero tax. In Ireland, the country's corporate rate of 12.5 per cent, the lowest in Western Europe, has become the object of a tug-of-war between Irish officials desperate to keep it and the German bankers bailing them out, who see it as a threat. In Canada, an election is being fought between Conservatives who would cut it to 15 per cent and Liberals who would raise it back to its 2010 level of 18 per cent.

In fact, the strongest arguments against corporate tax come from the left. They were most eloquently expressed by Robert Reich, the economist who was considered on the far left of Bill Clinton's cabinet during his tenure as labour secretary. Corporate tax, he noted, is fundamentally regressive: It shifts wealth to the rich. And not just because General Electric avoids it and corner shops don't. Since corporations do not physically exist, corporate tax is ultimately paid by individuals - and, as many studies have shown, those individuals tend to be the company's workers more often than its shareholders or executives.

There is another strong argument against corporate tax: It gives businesses far too much power in politics, law and society. As "taxpayers," corporations are given citizen-like rights in court and legislatures; as financiers of the state, they are given far too much lobbying power and influence over legislation - almost obligatory given their large taxpaying role. The Canadian documentary The Corporation ironically made the strongest argument against corporate taxation. It turns corporations into de facto humans, which is not healthy for democracy.

A truly fair and healthy tax system would place the burden entirely on personal income tax, which is the most progressive and far harder to avoid. That would solve all these problems. It would also dramatically raise income tax for people like me. Not an election-winner, but a necessary move to restore sense to the world.

Editor's note: An earlier version of this story online and in Saturday's newspaper incorrectly stated Robert Reich had been fired from his post as U.S. Secretary of Labor. This version has been corrected.

Follow on Twitter: @dougsaunders

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