How do governments speak to their people? Not just through dubious slogans and broken promises.
Their serious and committed voices are expressed through tax policy. In the Western world, one message has come across loud and clear: Governments prefer corporations to middle-class individuals and, as proof, have repeatedly lightened the tax burden on the former at the expense of the latter.
That message has been consistent pretty much since the 1970s, when the neoconservative agenda, championed by Ronald Reagan and Margaret Thatcher, decided that the rich – whether they be corporations or millionaires and billionaires – were taxed too extravagantly.
The argument was this: Lighten their tax loads, and they will plow the savings back into the economy – lifting employment, productivity and salaries and, ultimately, GDP and overall tax generation for governments. Of course, it didn’t quite work out that way. Companies and the rich got richer, everyone else didn’t. There was no pot of gold at the end of the neoconservative rainbow for the average working grunt.
Enter U.S. President Joe Biden, the successor to a man who never saw a tax giveaway he didn’t like. Mr. Biden’s new mantra, to the predictable horror of Republicans, is tax and spend. He may be the man to break the endless race to the bottom on tax rates. Non-rich individuals and families should cheer.
Mr. Biden is rolling out trillions of dollars of spending proposals, including the US$2.3-trillion American Jobs Plan – better known as the infrastructure bill, even though only about half that amount will go to bridges, roads, rail and the like. The idea is not to print money or run up the deficit to fund the infrastructure bill; instead, the taxman will knock on the doors of corporations.
Mr. Biden wants to raise the posted corporate tax rate to 28 per cent – President Donald Trump had cut it to 21 per cent from 35 per cent. At the same time, the White House is proposing a global minimum corporate tax rate of 21 per cent, which would be paid by large businesses wherever they operate. The goal is to stop the cynical international tax arbitrage game, in which companies seek to move their operations or headquarters to low-tax countries such as Ireland and Cyprus.
There is no guarantee that either the domestic or international tax-raising gambits will work. Mr. Biden may be forced to compromise on both, though it seems certain that, one way or another, U.S. companies will pay at least somewhat more tax. It’s about time.
Corporate taxes have been falling everywhere for decades. According to the OECD, the average posted tax rate among wealthy economies fell to 23 per cent in 2018 from 32 per cent in 2000. American economist Kimberly Clausing, a tax analyst at the U.S. Treasury Department, calculated that corporate tax revenue relative to GDP fell to 1 per cent from 2 per cent after Mr. Trump’s tax-cutting rampage in 2017. The OECD average in 2018 and 2019 was 3.1 per cent.
In Senate committee on finance testimony in December, Ms. Clausing noted that U.S. corporate tax revenue was ever-lower despite ever-higher corporate profits. After-tax profits as a share of GDP averaged 9.7 per cent from 2015 to 2019; between 1980 and 2000, they averaged just 5.4 per cent of GDP.
The conclusion is inescapable: If corporations pay less tax, everyone else has to pay more.
Canada has followed the trend. Liberal and Conservative governments alike have cut corporate taxes to the point that any sense of tax balance is gone.
The federal public accounts reveal that, in the early 1960s, total Canadian corporate tax revenue was about 60 per cent of total personal tax revenue. It’s now about 30 per cent. The tax burden on the individual has, relatively speaking, doubled. In the 2018-19 fiscal year, personal income tax accounted for 49 per cent of federal tax revenues; corporate income tax, just 15.2 per cent.
In other words, tax relief has for the most part been directed at those who need it least. The fact that individuals now do the bulk of the heavy lifting on the tax front partly explains why your parents and grandparents could afford a house and a car and live fairly well on one income while many families today struggle to make ends meet on two.
Still, the propaganda that low corporate taxes make companies – and countries – more competitive and ensure greater investments in the economy and productivity persists. Never mind that, as corporate taxes came down, share buybacks went up. In 1994, buybacks among S&P 500 companies came to US$56-billion. By 2018, the figure had climbed to US$875-billion. At the same time, share-based executive compensation packages have exploded in value. A lot of the tax savings went to buybacks, it appears.
Mr. Biden wants to end this blatant inequity. This week, a Morning Consult/Politico poll found that 65 per cent of U.S. voters support corporate tax hikes to pay for the infrastructure plan. The President is onto a good thing. He knows that voters have no sympathy for companies that haven’t paid their fair share of taxes for decades.
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