In the past few days the hot debate about corporate taxation has escalated to this: Why don’t we just abolish corporate taxes?
No politician is talking about it on the campaign trail (though the Conservatives’ Maxime Bernier has in the past, calling it the “pro-people” choice); but it’s fuelling “extreme” debate in the media.
Economic theory gets thrown around. Corporations don’t pay taxes, people do. Capital is mobile, tax-shift happens. Even tax fairness has been invoked (small companies pay, big companies don’t).
If zero is the smart target, why isn’t anybody there yet?
By 2010, only five OECD nations had federal corporate tax rates as low as Canada’s or lower. (Two of them are Ireland and Iceland. Nuff said.) Not one had zero corporate rates of taxation. Even emerging economies, including China, India, Russia and Brazil don’t choose zero corporate taxes.
Tax havens do exist, but they are generally small nations, not powerful economies. Why?
1. LEVERAGING GROWTH
Cutting corporate taxes is positioned as a pro-growth strategy. Getting to zero corporate taxation may attract more investment on the way. (Or it may not -- Jim Stanford makes a case here.) But once you get there, what’s next?
A non-zero rate of corporate taxation gives nations some leverage, something left to cut. Governments can incent desired corporate behavior through carrots, not sticks. (Think tax holidays for companies that hire young people, train apprentices, become more energy efficient, etc.).
Nobody – not nations, not corporations, not families – willingly gives up its tools for shaping change.
2. CORPORATIONS ARE PERSONS TOO
In the eyes of the law, corporations are persons, with legal rights.
Canadian governments have taxed individuals and corporations in various ways since the late 1800s. In 1917, the federal government brought in income taxes. Incomes of corporations and individuals were treated identically and faced the same rates. (The U.S. introduced corporate income tax in 1909; the U.K. in the 1880s.)
The key insight of economic theory is that corporations pass through the costs of taxes, in the form of higher prices and/or lower wages, or lower dividends (at least in the short run).
So, if corporate taxes are already fully worked into the price system, when corporations stop paying taxes, prices should go down, or wages up, right?
More likely, the savings will land in the pockets of shareholders, many of whom are non-residents. In the case of multinational corporations, which increasingly drive our economy, eliminating corporate taxes would starve Canadian public treasuries (federal and provincial) and feed the treasuries of other nations, as argued here by Erin Weir.
What, exactly, is gained by Canadians? They get to pay more, and descend into endless disputes about which services to cut.
3. FILLING THE FISCAL HOLE
In 2009-10 corporations paid $30.4-billion in corporate taxes to the federal treasury alone… and that was an awful year for corporate profits.
Replacing $30-billion would require raising the GST by roughly five percentage points. In Ontario, people would be paying at least 18 per cent in taxes on most purchases. Insert sound of backlash.
Some economists say replacing income taxes with consumption taxes is the way to go. Who benefits? People with savings. Proportionately more people at the bottom of the income spectrum spend all their money. Proportionately more people at the top have enough income to save.
Pause for a moment on the fact 50 per cent of Canadians had after-tax incomes of less than $25,400 in 2008, before the recession hit. The price of the basics -- energy, food, housing, tuition -- has risen since.
Have fun trying to raise taxes on rising prices.
Instead, less service is what’s on the menu -- the Conservatives’ latest budget and campaign pledges have pointed to $15-billion in planned cuts to balance the books. Add $30-billion to the problem -- while corporate profits rise -- and watch what happens.
4. NO FREE LUNCH
Canadians get huge value for money from public services. Corporations do too. Policing, the justice system, business subsidies, protection of intellectual property rights, and a massive system of transit infrastructure (from seaports and airports, to rail and road systems) are just a few high-cost items that specifically serve and protect business interests. The bottom line also benefits from a sea of educated and healthy workers who double as consumers with relatively high disposable incomes.
Public policy, public institutions and public services all increase corporate profits.
Saying corporations should pay nothing for these benefits is like saying they have rights but no responsibilities. And that runs against every principle of justice society holds dear.
A revolutionary war was fought and a nation formed on the principle of “no taxation without representation”. It’s a hard sell to suggest the most powerful entities in society should have representation without taxation.
The “something for nothing” argument also flies in the face of the fundamental principles of capitalism. And if corporations don’t defend its principles, who do they think will?
Eds note: Join Armine Yalnizyan and Mike Moffatt of the Richard Ivey School of Business today at 11 a.m. for a live discussion on corporate tax rates. globeandmail.com
Armine Yalnizyan is a senior economist with the Canadian Centre for Policy Alternatives