Corporate tax hikes: A Liberal pillar on shaky ground

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EXPENSIVE PROMISES

The Liberals are out of the gate this week with big promises to help students, create new childcare spaces and eliminate seniors' poverty. You can almost hear the cranky mother from the Enterprise Rent-A-Car commercial shouting "sounds expensive."

The promises are coming from the same party that regularly attacked the Conservative government in Parliament for failing to craft a credible plan to erase Canada's deficit. They seem to want it both ways: They're positioning themselves as more compassionate than the Conservatives, while insisting they'll outdo the Tories on fiscal responsibility. Liberal Leader Michael Ignatieff promised his plan would be cheaper than the Conservatives and "will not raise taxes on families."

Today The Globe examines the economics of a key financial pillar of the Liberal platform: higher corporate taxes.

A LUCRATIVE TAX

Liberals estimate they would raise $5-billion to $6-billion a year by returning the tax on corporate profits to 18 per cent from 16.5 per cent and scrapping next January's planned cut to 15 per cent. The Finance Department, however, doesn't think the impact would be that large (perhaps $4.5-billion a year). It could even be less. Finance doesn't tally the Conservatives' contention that lower taxes would spur stronger growth, and therefore produce more tax revenue.

It's trickle-down economics of a sort. If companies pay less tax, they will be able to pay more in wages, employees will have more to spend and the government will get its money back via sales and income-tax revenue as well as higher economic growth. That may be true, but trying to connect those dots is such a murky exercise that Statistics Canada won't even try to measure.

Trimming Conservative spending on new prisons and fighter jets could also free up cash, but only over the longer term. Meanwhile, the Liberals are paying for other promises with offsetting tax changes. Their $1,000 a year subsidy for postsecondary tuition is partly offset by scrapping tax credits for education and textbooks (savings: $500-million to $700-million).

THE POLITICS

There's a good reason the Liberals want to maximize the amount of money they'd save by rolling back the tax cut. The bigger the envelope, the more they can spend without sacrificing their promise to be better fiscal stewards than the Conservatives. Think of it as an election slush fund. The Liberals can sprinkle pricey campaign pledges across the country, while simultaneously vowing to balance the budget on the same timetable as the Conservatives.

THE ECONOMICS

If only it were that simple. The economics of corporate taxes are tricky. Unlike people, companies are really flow-through machines. They quickly pass along costs in higher prices or lower wages. They're built to make money. Squeeze their profits, and something has to give. Individuals don't react as ruthlessly.

That's why raising tax revenue imposes different costs on the economy, depending on where Ottawa bites. A dollar of revenue costs $1.11 via the GST, $1.17 via personal taxes and $1.70 via corporate tax, according to a new study by the C.D. Howe Institute. "The corporate tax is a very expensive way of raising tax revenue," C.D. Howe President William Robson said.

There's also global competition at play. Companies make decisions on where to invest, based on many factors. Even after the Jan 1 business tax cut, the combined federal and provincial rate is still above the OECD average, but below the G-7.

A BLIND-SIDE HIT?

Perrin Beatty, a former Conservative cabinet minister and now president of the Canadian Chamber of Commerce, warned recently that rolling back the tax cut would be a "blind side hit" to the Canadian economy, costing tens of thousands of jobs and sapping growth. Jayson Myers of the Canadian Manufacturers and Exporters warned more cautiously of "unnecessary uncertainty."

The warnings are a bit overstated because Canada's tax rate - under either the Liberal or Conservative plans - remains close to the international norm. Other factors, such as the high Canadian dollar and lofty land values, could prove far bigger disincentives. Canada won't "fall off a cliff," but it clearly sends the wrong message to companies and the rest of the world, argued Ian Lee, MBA director at Carleton University's business school.

THE BET

The Liberals are betting on cheque-book math over economic theory - that Canadians would sacrifice tax breaks for "wealthy" companies on the altar of some extra cash for themselves.