The Legend of Zero
No politician is talking about it, but there is a growing debate about corporate tax cuts, and it’s not about whether they should go up or down 1.5 percentage points. It’s about getting rid of them.
Zero corporate income taxes.
It is fast becoming the legendary goal for tax reform in some opinion-makers’ minds, and they are saying that economic theory proves them right. Not so fast.
Today’s column by Doug Saunders in the Globe and Mail is the latest to climb onto this theoretical bandwagon.
Saunders marshals an economic justice line of reasoning to bolster the argument – big corporations get away with tax avoidance, small ones can’t.
But the key observation of economic theory is the compelling insight that corporations, not being people, don’t pay taxes anyway – they pass them through in higher prices and/or lower wages, or even lower dividends, at least in the short run. Stephen Gordon makes the case in his usual lucid and succinct style here.
So, since corporate taxes are totally worked into the system, what are the chances that prices will go down, or wages up when corporations pay less? That should be the effect of abolishing corporate taxes, right?
Chances are the windfall will end up in the pockets of shareholders, many of whom are non-residents to begin with. In the case of multinational corporations, which increasingly define 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 bitter disputes about which services to cut.
In order to replace the revenue that corporations used to provide, Saunders says we should raise personal income taxes. Michael Hlinka (the voice of all things economic on my local morning CBC show) says raise the GST, the position of most other economic pundits who favour the theory of zero. They cheerfully acknowledge they would never get elected on such a platform, as in this debate between Hlinka and I.
Neither mention the likely losses that lie ahead with respect to public supports and services. In 2009-10, corporations contributed $30 billion to federal revenues alone. GST would have to go up by 5 percentage points to replace it. People in Ontario would have to pay an 18% sales tax on most purchases just to hang on to the inadequate service levels they’ve already got. Insert sound of choking at the mere suggestion of an 18% GST, and you can see how quickly service provision will deteriorate, not improve.
At least these theorists are honest enough to acknowledge that money will have to come from somewhere.
The Harper Gang believes cutting taxes make them grow. The fuel for this thinking is not evidence, not even so much theory, but hot emotion. Harper has built his career by expressing his hate-on for government intervention, perhaps nowhere more clearly than his statement: “I believe all taxes are bad.â€
So while zero corporate taxes are nowhere on the political radar right now, watch out Canada. Building more jails or eliminating the long-form census questionnaire was on nobody’s radar a few years ago. Both are senseless policies, widely rejected. Both are happening anyway.
Sadly, it looks like more air time will be devoted to discussion of zero corporate taxes in the next few days. It’s sad because we are in the middle of an election campaign and should be talking about real issues, not theoretical ones; issues like health care and infrastructure deficits and where our resource-rich economy is headed.
That’s what needs to be discussed during the election, but I’ve been booked for an on-line discussion about corporate taxes at the Globe and Mail next week. I will also be dancing with Charles Adler on the topic at 8 o’clock on Tuesday April 19 on Sun TV, the second night of the new hard-right broadcaster’s debut week. (Faux News of the North launches on Monday.) I’ll file at least one more blog on corporate income taxes at the Economy Lab, and will undoubtedly write more on the topic for this blog too.
But let me close today’s blog by getting back to theory and principles of how an economy works best.
The corporate form brings together larger stocks of capital – and thus higher rates of profit – than is possible for indiividuals.
Corporations aren’t people, but they have legal rights, just like people. Corporations are also protected, some would say advantaged, by the rule of law and a justice system that governs behaviour — not always even-handedly. Corporate interests are represented, some would say overmuch, at every public decision-making table in the nation.
Corporations benefit from public policy, public institutions and public services, without which profits would be far, far lower.
If the argument is that corporations should pay nothing for these privileges and benefits, it’s like saying they have rights but no responsibilities. And that flies against every principle of justice society holds dear.
A revolutionary war was fought and a nation was formed on the principle of “no taxation without representationâ€.
You can try, but any theory that suggests it is in the public interest for the most powerful entities in society to have representation without taxation is unlikely to pass the sniff test of democracy.
Great post Armine,
I do think theoreticians try to pull a fast one on practice with this debate. It truly is not that difficult to understand and Mr. Gordon again falls over his apparent big head, which is really masking just a really big wind bag of hot air.
It truly is a simple ask any person on the street- do you think corporation should pay less taxes? They will say without hesitation- yes.
Why because they understand a fairly simple concept- a business entity need roads to drive on to make a profit- they need people that can think, work and design your production process and hence schools, you need people to be in good health hence hospitals, etc- you need public goods and services to make a profit. Adam Smith 101. The question I guess is- to what level and hence what cost and how are the expenses allocated.
However- to jump ship and move to zero is truly something that I did have an awful nightmare about watching on Sun News. It will be the gutter talk of economics.
The drive to bottom to attract investment is a decision that ideologically filled minds from such economic gutters of sleaze are those that believe the social other is nothing more than somebody who better behave or you lock them up- or bomb them if they threaten your collection of people. (the right’s belief in armed forces and crime to protect assets and the rule of private property)
In a real country striving for modernist goals of enlightenment, I just do not see the math on taxation with zero corporate taxes unless we see some huge tax reform that focuses on the top end and/or tapping into revenue streams of shareholders, that somehow has an international reach. It is bad enough we have transfer pricing and all sorts of other corp tax loop holes. I think we need a wiki leaks to tell us just how taxes are really being paid in Canada by Corporations, as I would be electrically surprised if somehow one could add all that revenue up and get an 18% figure for the FEd level.
The social does cost something, and for many years the corps went along with it and helped build a social. Since globalization hit with a religious zeal in the 80’s, corps no longer think they need a social or a much scaled back social (just go to an export processing zone for evidence) and hence the corp tax declines.
Zero corporate taxes should be deemed as grounds for treason in this multinational branch mine and oil extraction country, ( I was going to say branch plant but there are not many of them left so).
I will say this very clearly- whoever promotes declining, or worse- zero corporate taxes in Canada must be a foreigner and/or is trying to destroy the country.
I think it is Time for a new news channel.
I would love to see some US General Electric paying no tax examples in Canada, I know they are out there we just need the tax man to spill the beans.
queue in the Beatles song “the tax man”.
pt.
It truly is a simple ask any person on the street- do you think corporation should pay less taxes? They will say without hesitation- (scratch this should be no) yes.
I have to say after all the cash spent by the NEo cons convincing people that corp tax cuts create massive amounts of jobs- I am becoming confused.
It is such a sad topic but so so so important to win. It will be the end of healthcare, education and many many other programs. It has already cost Canadians billions of dollars since 2001- and the jobs, well the construction sector is at its highest level ever! LAst month tally I calculated is the highest proportion ever that the construction sector recorded as a proportion of total employment. Yeah foreign investment- lets try public investment called stimulus money created these jobs.
That G&M piece was the most absurd piece I’ve read in some time. Faced with an easily solvable problem (corporations take advantage of tax loopholes), Saunders somehow misses the blindingly obvious solution (remove said loopholes), and instead decides we should not only surrender to the genius of their tax lawyers but should give up collecting taxes at all.
With such wisdom in our national punditry it’s surprising we haven’t progressed much farther as a country. In other news, some people get away with committing crimes, so it’s time to abolish the Criminal Code!
A rather fundamental reason for corporate taxes is to prevent massive personal-tax avoidance. If corporate taxes were abolished, people could indefinitely defer paying tax by incorporating their income-generating activities and keeping the money inside their corporation.
Saunders’ premise that corporate tax falls disproportionately on small business is wrong. It is true that only multinational corporations can take advantage of tax havens, transfer pricing, etc. However, it is far easier for small enterprises to underreport revenue and overstate expenses.
Anyway, small business enjoys lower statutory corporate tax rates, especially in Canada. So, even if big business conceals a greater portion of profits, it is not clear that small business pays proportionally more.
The opening line, “No politician is talking about it,†is not quite true. Maxime Bernier is (or was).
But what bugs me is ostensibly progressive, or at least liberal, commentators like Doug Saunders and Tom Kent floating this half-baked idea without thinking it through. Contrary to Saunders’ op-ed, I am pretty sure that Robert Reich is not among those suggesting the abolition of corporate taxes.
What’s wrong with an 18% VAT? Sounds good to me.
If Ontario raised it to 18% (13% provincial portion of HST), it would bring in something like $10 billion in new revenue to the province. That would make up the bulk of revenue lost to income tax cuts since 1995 – the rest could be made up with income tax hikes on upper earners. Pretty soon you’d be talking real money.
Just for the record- if the theory actually worked for this, i.e. lower CIT produced massive amounts of good quality jobs, then I would be inclined to support such efforts as then we would be growing the personal taxation base from which a larger amount of tax could be extracted.
However, the essential model that many use to theorize such policy, are using a model that does not reflect reality and that is exactly what the empirical evidence over the past 30 years proves.
To me we must frame this in the continuing disintegration of the social requirements that the post war compromises between capital and labour were based on and the growth of ideological reach of a Prime Minister that seems bent on destroying the fabric that this country is build upon.
The compromise of higher and higher personal taxes with lower public services will never work in this country- and that is the gamble Mr. HArper is making with our future. If it is not this election it will be the next that he is finally thrown out.
Ironically it has been stringent Liberal housing policy and draconian liberal cuts under Martin and Chretien that HArper sailed through on that recession on.
Again it is the backs of workers that Harper piles more of a load on, yet looking at election results, it is these same people who vote him into office. I guess it is time that this class war heats up in Canada.
If Harper ratchets down the CIT further and as he has planned all along starts cutting into the meat and potatoes of the social programs that is the tie that binds and keeps this quite geographical and multicultural country together, then he will hopefully be thrown from the throne of power.
Sad to see so much upheaval to achieve such lessons.
Why is it that the 1% and their theologians–forgiven me, theoreticians–always believe they know best?
The argument, as always, is, as Yalnizian points out, is to raise consumption taxes, but they know they could never win an election on such a platform. But then, they may well win an election on the basis of what should be cut so that taxes on the 1% CAN be lowered.
What else is happening in the United States right at this moment?
And it is coming here. Maybe all it is is an investment theory of politics that says those elected will serve the interests of those who ‘invest’ in them.
But what about those who champion these same interests when it is against their own class interests? Maybe they refer to the sayings of the theologians, sorry, the theoreticians.
Maybe, if I were making over $150,000 I wouldn’t mind those making $25,000, if that, paying much more in their VAT/GST/HST while my income taxes fade to nothing, and my ‘dividends’ and ‘capital gains’ are not taxed at all.
This, of course, is class war.
Was it Warren Buffet who said there is class war in the United States and his class is winning?
Isn’t that happening right here in Canada? Possibly right here on this blog.
I just saw this blog post tonight after sending a letter to the Globe earlier today stating essentially the same thing as Erin.
I recall prominent NDPers proposing abolishing corporate taxes two decades ago, but as Erin says, it’s a half-baked idea advocated by those with little or no knowledge of how the tax system really operates in practice.
Unless tax rates on different sources of income are roughly similar, then those with the means can structure and shift their income to reduce or avoid their taxes–and there will be pressure to reduce rates for other forms of income.
Taxing different sources of income at roughly similar rates–a buck is a buck is a buck–is a fundamental principle of tax policy that we’ve deviated far from over the past decade and more, with predictable results.
The argument of this article is what you get when you have someone who claims to be an economist but has no background in mathematics or proper economic theory. If you can’t master economics at the level of Mas Colell et al. you have no business whatsoever commenting on problems that are really one of general equilibrium.
Look, it’s simple: Corporations DO NOT pay taxes, people do. Corporate taxes are paid by either the owner (shareholder), the employee, the consumer or a mixture of all three. If what you want to do is tax the shareholders more heavily, then do that. And don’t give me that crap about foreign shareholders – add a non-resident withholding tax if you want – it’s easy to do.
Corporate taxes are easy to sell because it looks like no one is actually paying the tax. It looks like only some abstract entity that has too much money anyway is paying the tax. But this is silly bookkeeping economics – only people pay taxes, nothing else can. The worst part about corporate taxes is that you really have no idea who is actually paying the tax (shareholder, employee, consumer) – which makes understanding distortions difficult. And, yes, understanding distortions is an important issue in tax policy.
Again, the author of this article makes the mistake of assuming that if corporate taxes went to zero, the government would lose all that tax revenue. This is a nonsense statement – the equilibrium at zero corporate taxes is different that the current one! All things are NOT left equal under this change (which if the author could actually calculate anything, she would know). The government can easily obtain the necessary revenue in a zero corporate tax environment from dividend withholding taxes, increased capital gains taxes, increased income taxes, and or increased sales taxes.
Most importantly, the “economist” who wrote this article does not understand the difference between normative economic statements and positive statements. I am not saying anything about the merits of a society with total wealth split as unevenly as it is in Canada today. If you want to change that, fine. Redistribute the wealth. Tax rich PEOPLE, not abstract entities. When you use a corporate tax to redistribute wealth, you are using an incredibly inefficient mechanism and the author would know this if she had a just a little bit more mathematics under her belt than a high school student and did a few calculations for herself.
A number that Armine did present is $30 billion of federal corporate tax revenue. Also abolishing the dividend tax credit would recoup $4 billion.
Total non-resident income tax is currently $6 billion, which includes the existing withholding tax on dividends paid to foreign shareholders, generally at a rate of 15%. Even doubling this amount would leave us far short of making up the $30 billion.
Without corporate income tax, how would you prevent the corporate form being used for unlimited deferral of personal income tax?
A very enjoyable post, Armine, and thanks for engaging this topic. My case against corporate tax is based on three unresolvable flaws: 1) it is regressive (even if all loopholes are filled, because it will more likely be paid by workers than by shareholders); 2) It distorts international competition by provoking tax-rate races; 3) It guarantees corporations citizen-like rights which allow them to distort the democratic system.
On the third: As you note, no taxation without representation. Removing the taxation would remove the justification for representation. As Robert Reich argued in his most recent book Supercapitalism (which makes the left-wing case for corporate-tax abolition), abolition of corporate tax must be matched with an abolition of corporate legal and political-influence rights. The Supreme Court recently ruled that corporations have first amendment rights, in part on the basis of their taxpaying status.
I don’t really understand why the capital gains and profits of corporations need to be taxed themselves (regressively) when those gains and profits only matter when they are realized by an individual as income or consumption, which can be taxed progressively. A corporate profit that doesn’t turn into income or consumption shouldn’t be of interest, much as a change in the value of your house is of no interest to Revenue Canada unless you choose to sell it. If those gains are realized in another country, then they’re part of another country’s economy and thus subject to their income or consumption taxes. We have far better tools today for policing international income-tax avoidance than we do for corporate taxes deferred to international branches; I doubt the latter will ever be fully resolved.
I was delighted to learn from you that shifting corporate tax to GST would raise GST only to 18%. As a British taxpayer, I am accustomed to a national sales tax of 20%, which has helped the economy by increasing the savings rate, so you’ve made a strong case for shifting corporate tax to consumption rather than income tax (though I’d acknowledge that consumption taxes have an unequal income that needs to be balanced through policy).
One addendum to that: I don’t fully understand the argument about corporations using government infrastructure etc. Surely it is individuals (either employees or customers of corporations) who are the actual users that infrastructure. A federal-funded stadium is “used by” a stadium corporation and its customers, but wouldn’t it make more sense to charge for this use through (progressive) taxes on the salaries/dividends/realized capital gains of employees and GST on ticket sales than through the artifice of taxing corporate profit, which very often is zero even when the preceding four categories are substantial?
“The government can easily obtain the necessary revenue in a zero corporate tax environment from dividend withholding taxes, increased capital gains taxes, increased income taxes, and or increased sales taxes.”
Just which alternate political universe to you live in?
Actually, in view of results like this:
(http://darp.lse.ac.uk/papersDB/Tuomala_(JPubE84).pdf),
I think the next battleground is likely to be whether further personal income tax reform, in the shape of a flat (tecnically degressive) tax, is needed.
As I said, corporate taxes are already a tax on people. You can achieve the same wealth redistribution goals taxing in a more transparent fashion. Let’s be honest about what we are trying to do. Some people (the hard right) object to wealth redistribution for ideological or philosophic reasons. The issue of corporate taxes is not that issue – it is the positive economic problem of taxing in the most efficient method possible. Whether taxing to redistribute wealth is the “correct” thing to do is a normative issue. (And BTW, so that you understand my ideology, I am not a conservative, never been a conservative, have never voted conservative, and never will.)
One complaint that you hear about with zero corporate taxes is the possibility of indefinite deferral. Again, this is nonsense. If you think about this claim, it is a claim that the Nash equilibrium of the new tax policy is to never pay a dividend. I can tell you right now, that unless you have worked that game out, you are just making things up. Perhaps you need a refresher on the Modigliani–Miller theorem which is an excellent background theorem about capital structure. (Again, you can’t have this discussion without mathematics to keep you honest. Without the math, all this corporate tax argument degenerates into an undergraduate 2am BS session.)
Don’t forget that under the current corporate tax policy, corporations hire legions of tax attorneys who specialize in trying to minimize the taxes paid. This is a deadweight cost to society. If those tax attorney jobs did not exist, the bright people who now occupy them would be doing something more constructive for society. As an economist, I am forced to think about the problem in its entirety – not just in some limited bookkeeping sense.
Corporations will always invest in themselves when it makes sense to do so. Under such circumstances the corporation is trying to grow and it is using its capital as effectively as it can to make wise decisions. Of course it does not always work (there is risk after all). But no corporation will refuse to pay a dividend so that it can sink capital into potentially ruinous projects for the sake of it so that the shareholders can avoid taxes on dividends. Would you buy the stock in such a company? Corporations simply will not do that. On the other hand, if a corporation has found a capital intensive project that will lead to real growth (and hence defer the shareholder tax by moving to a no dividend policy), then this is EXACTLY WHAT WE WANT THEM TO DO. Think about it – it will mean that the capital is being deployed to make more and better products at lower costs. We WANT the corporation to succeed – that is why they are making a profit in the first place – society likes the goods or services that they provide. The profit signal is to make more of it or improve it. So, society gains under the decision to invest in more productive enterprises.
I will say it again, if you want to redistribute wealth, that’s fine. Do it. Tax the PEOPLE with the capacity to pay and transfer the wealth to those who you think need it. But don’t pretend that corporate tax offers a free lunch because if you trace the mathematics of it, you will quickly find that it does not.
No one is arguing that large, publicly-traded corporations would stop paying dividends. (However, it is worth noting that recent increases in after-tax profits have gone more into accumulating cash than into dividends or investment.)
The point is that many people, especially high-income professionals, could set up their own private corporations to defer personal tax. Excessively low corporate tax rates for “small business†already encourage such avoidance. However, it would be vastly worse with zero corporate tax. What’s your solution?
I just love the math types, it is all just so easy, and the rest of us who use the math but pull the levers of reality are just a bunch of realistic political economy idiots. However to turn their mathematical mental masturbation into reality, and all that dead labour of Nash, Bertrand and the thinkers falls into the ditch hybrid side of the farm.
I wish economics was a nice clean science, as we surely would not be at the edge of existence that we are. I wish we had nice easy game theory that would so daily fit into some nice simple game theory exercise. But then I would be an idiot.
Tax lawyers smart people, anybody that spends their day helping wealthy companies avoid taxes are not what I call human, maybe smart but definitely not human or at least ones I try to avoid.
There are options to tax wealth and that is what we are
Talking about. I guess what the focal point should be, how do we get those with the wealth to pay more as they should. Te modernist project was set in place to increase public utility for all and have the disruption of costs spread in a way that locals did not go around with an axe in their hand trying to find the rich. Try and quantify that and out it into a Nash equilibrium, which to me Is merely a calculus minimization trip.
When it comes to tax, it is never an easy math equation.
Given the whole financialization of the economy, i am not sure anything that Avon refers to is even relevant. Potentially in an economy that investment into a production process that produced real outputs is the only option, but given we cannot get capital to come out of the global casino I am pretty sure that should be the first critique and not on zero corporate tax.
Doug, thanks for joining the discussion. We were not ignoring your comments. Since you have not posted on this blog before, they were stuck in the moderation queue.
I am not buying your argument that corporate tax “guarantees corporations citizen-like rights which allow them to distort the democratic system.†The courts have accorded corporations citizen-like rights. Abolishing corporate taxes would not overturn those legal precedents.
I have evidently not read Supercapitalism (which is not Reich’s “most recent bookâ€). However, there is a huge difference between making corporate-tax abolition conditional upon “an abolition of corporate legal and political-influence rights†and just assuming that one naturally leads to the other, as your column seems to.
Corporations distort the democratic system by hiring lobbyists, funding pro-business think tanks, and financing political parties. Untaxed corporations would have more money for all of those things (although at least they would not be tax-deductible.)
Most importantly, the lobbying clout of corporations stems not from their status as taxpayers, but from their status as employers. The implicit or explicit threat of relocating existing jobs and/or the promise to create new jobs make politicians listen regardless of corporate tax payments.
First, economics is hard and that is why you really need mathematics to keep the logic straight. Without it, you cannot know if your thens really follow from your ifs. Sorry, but you can only understand the world through mathematics – explaining why that is so to someone who is innumerate is like trying to explain Mozart to the deaf. Economics done right is essentially mathematics – economics is a mathematical science.
As for wealthy people incorporating, there are many, many ways to deal with this (employee numbers etc.). What you’re concerned about is tax arbitrage and it can be solved. This is a non-issue if you have read anything about tax arbitrage. Which exact implementation used by a government to prevent the wealthy from exploiting tax arbitrage in a zero corporate tax environment is not the problem here – corporate taxes in which we do not know who is paying the tax is the problem.
I agree that tax lawyers spending their time looking to minimize taxes is a loss – that’s what I’ve been saying. Imagine if that smart tax lawyer was a criminal lawyer working to help solve criminal court backlogs (a place that would help the most vulnerable in our society the most). Instead corporate taxes make sure that the brilliance of the tax lawyer is put to a deadweight loss.
Corporations do not distort democracy – a government that is too large and occupies too big of a share of the GDP is the destructive element. Lobbyist work on behalf of rent seekers and rent seeking only works if the government creates artificial shortages through barriers to entry (Hmmm, I wonder if the Bank Act is connected to mutual fund MERs of 2.5% in Canada?). If the government can’t offer the rent, then there is nothing for the lobbyist to do.
Get government out of the way of free markets. Use government to concentrate only one the most vulnerable and weak in our society by ensuring basic human dignity for all, and only on those economic activities that from a cost benefit are advantageous for the government to assume. Then let the markets sort everything else out.
I am unclear on Robert Reich’s position. In 2007, he did propose abolishing corporate tax in exchange for overhauling the legal status of corporations. But a couple of months ago, he blasted the U.S. Chamber of Commerce for its advocacy of “. . . cutting back Medicare and Social Security, reducing or eliminating corporate taxes, and, in general, taking the nation back to the days before the New Deal.â€
Yes econimics is mathematically based but do you actually believe such pure outputs describe human relations, behavior and survival? Sorry Avon, but you lose me in that one, and to limit your rAtionality to such arcane logic is just plain not using your head. Recall the page you are on, yes there are some truths in the merging of the two fields, but lets not supplant one and throw away the other. That is just like a technician.
It is beyond the scope of this thread to argue with you, but I did want to make you understand there is more to economics than minimizing and maximizing, that is plain and simple practical economics 101. Not everything can be quanified and even that which is, rests upon some shaky data.
So please do not come onto the site and hammer away with your math hammer, we have been through it many times on these blogs and yes we do respect math, but it Must be tempered by common sense and practice. There is a reason there are differences of opinion in the field and it starts with your premise that everything in economics is countibile, reducible,measurable and mathematical.
I personally do not buy it, and never will as that is just not how phylosophy works in this universe. Yes the sun is roundish and so seemingly circles are natural, but it does not mean I cannot believe in squares. Especially if the peg I have is square.
There
Erin I have mr Reich on my facebook and he is definitely against Corp tax cuts. Just reading his twitter today and it kind of focuses on that I will post it later.
“Economics done right is essentially mathematics – economics is a mathematical science.”
This is precisely my point about theologicans, not theoreticians. As others have pointed out, it is not possible to explain the way people interact not only with each other, but also with the society they are part of, and create, not only with their mathematics, but also their beliefs.
The “mathematical hammer” referred to above is always deployed in service of a particular belief, a set of values, a construct of norms. Please don’t describe yourself as a “pure, detached and disinterested desire to know” as my Jesuit friends once described it.
It has been a long evolution to divide political economy into the ‘dismal science’ and shunt the study of raw power–political economy–into some bin called, what, inexactitude?
Power is the most evident reality in the world, particularly to those who make less than $150,000–who are under its heel.
The arguments of science are always the same.
They call for the dissolution of the bonds making our lives meaningful in the service of the ultimate in instrumentality: the extraction of money that relegates both people and the environment into the category of externalities.
The failure of science, certainly that which calls itself that, is the rending of the bonds that make people, well, people, not inputs in its analysis of structures, not realizing how even the perception of these structures is the result of power.
Political economy is the lens through which to view power and the compass that enables us to challenge it.
I think that it is likely true that higher corporate taxes are inefficient relative to other possible forms of taxation within the policy framework that most economists use. As Prof. Gordon suggests, Nordic social-democracies have corporate rates comparable to Canada’s now, but they have higher VATs and PITs. The OECD averages reflect this basic trend, too. I think that using corporate taxes as a central lever in the debate over the size of government is probably too “easy” and limited. Some progressives seem to go “if you are progressive then obviously you’ll oppose handouts to fat cat corporations” and I appreciate that’s popular on the left but it seems inadequate.
I read the arguments here every day and I find the points also often seem misleading or are targeted against the exaggerations of the Right rather than the more academic evidence-based issues about incidence and so on. That said, there are good arguments for limiting the power of corporations or even transcending them through socialism, I’m just not sure that taxation is the best tool for this.
It seems to me the problem isn’t the disproportionate money the rich have, it is the disproportionate power. The rich becoming richer is just a symptom of the problem of the powerful getting more powerful.
Eliminating corporate taxes will allow this to worsen, because the rich only need to control the companies with money to exercise its power. There is no need to transfer it to themselves. Even public companies are controlled by their management as shareholders rarely refuse their requests.
Math is useful if it correctly reflects reality. To know this it must be tested against empirical data. If it hasn’t it is little better then speculation.
Meera Karunananthan has a letter in today’s Globe noting that corporate political influence is not proportional to corporate taxes.
Wikipedia informs me that American jurisprudence recognized corporate personhood (1819) four decades before the U.S. government first tried to implement a corporate income tax (1861) and nine decades before it durably succeeded (1909). So, it seems hard to argue that corporate income tax gave rise to corporate legal rights.
The whole notion of tax dodging by Corporations is a major problem as well- never mind getting capital to pay its fair share, how about framing the debate on getting them to pay period. It seems to be that the Corporate tax issue in the US is transforming from tax reduction to getting the Corps to pay something.
Reich’s blog post on Corp taxes, I do not see how this is supportive of corp tax cuts.
http://www.huffingtonpost.com/robert-reich/why-obama-is-proposing-wh_b_707398.html
Congrats to Erin, who also had a letter published in the Globe today on Jeffrey Simpson’s previous column. Here’s the letter (below) I sent in on Saturday, but they didn’t publish.
To the editor:
Doug Saunders is wrong about abolishing corporate tax (April 16). Yes, different people have proposed it, but no large country has done so. Why not?
A basic principle of good tax policy is that income from different sources should be taxed at similar rates. If there’s a significant different in rates, then those with the means can structure their finances to accumulate income at lower rates.
Higher revenues from lower rates usually just represent income shifting. Corporate tax cuts result in pressure to cut higher income personal taxes as well.
Yes, corporate taxes are ultimately paid by individuals, but when they are below average foreign rates, the benefits go mostly to owners of capital–shareholders and executives–and not to workers or consumers.
Tax fairness is important—both between forms of income and jurisdictions. Ongoing corporate tax cuts lead to a race to the bottom in which only a few benefit.
Toby Sanger
In terms of incidence of corporate taxes, Jon Kessleman and Ron Cheung have a very reasonable analysis of this. They conclude:
“With Canada’s highly open economy and capital mobility, it is reasonable to assume that business taxes at rates that equal foreign rates will be borne by capital but that any higher rates will be shifted onto relatively immobile factors such as workers and consumers. “ This also means that cuts to corporate tax rates below the average foreign rate will largely benefit owners of capital and not workers or consumers.
Kesselman, Jonathan and Ron Cheung (2004). “Tax Incidence, Progressivity, and Inequality in Canada,†Canadian Tax Journal, Vol 52, No. 3. Also available at: http://www.sfu.ca/mpp-old/04research/pdfs/CPPR_tax_inequality.pdf
First, many thanks to Doug Saunders for weighing in. I have learned a great deal from most of the comments, and in my view that is the whole point of these types of blogs.
Sorry that I was so slow in responding but here are some answers to some issues raised in the past couple of days.
Re replacing $30 billion by raising GST –
That’s the back-of-the-envelope guesstimate of how you could find $30 billion. The value of corporate taxation will be higher in 2010-11, given what has happened to corporate profits since.
Would doubtless require more than a five percentage point increase to fully replace the foregone revenue now.
Consumption taxes may not be enough to do it.
Consumption is forecast to grow more slowly than corporate profits over the near term, and likely the long term too. In the near term: Consumption has grown to 58 percent of the economy since the recession (from about 55.5 percent before) – but there has been huge downward pressure on wages, benefits and pensions in the wake of the recession. The price of the basics – energy, food, housing, tuition – has risen since then. Over the long term, growing number of retirees will flatten the growth curve of consumption, in both durable and non-durable expenditures through demand. In both cases consumption volumes – demand – are likely to decline. However consumption taxes could still increase as a result of price inflation, not demand.
Re substituting consumption for income taxes –
Who benefits? People with savings.
Proportionately more people in the bottom part of the income spectrum spend all their money. (marginal propsentiy to consume is 100% for low income households). They would be fully taxed.
Proportionately more people at the top have enough income to save. (Those data are forthcoming from a Statistics Canada custom tab I’ve been working on.) They are not fully taxed. So who benefits most from a switch to a consumption tax base? The wealthy.
By wealthy, read above-average, actually well above average.
The average after-tax income of working age Canadians in 2008 was $34,500. In fact fifty per cent of Canadians had after-tax incomes less than $25,400. That’s the latest data available, and before the full impact of the recession had registered.
It is unlikely that any jurisdiction could or would want to further reduce disposable incomes of the electorate by five percent while adding to corporate profit margins.
Re disposable income –
There are two ways governments can add to household disposable income – by cutting taxes, and by providing public services. It’s easy to measure tax incidence. It’s a little more tricky to measure the incidence of benefits. One study by Hugh Mackenzie and Richard Shillington, published by the CCPA, does so. Called Canada’s Quiet Bargain, they found 80 percent of Canadians get more value in public services than they pay in taxes. At the halfway mark of the income distribution, the value of public services adds another 50% to a household’s disposable income. That’s value for money for most Canadian households.
Update: There will be another Economy Lab post from me related to this topic in the Globe and Mail, as well as an online discussion tomorrow at the Globe starting 11 a.m.
Thanks for that response Armine, and I look forward to your Economy Lab post.
The reason why I argued for shifting corporate-tax revenues to income tax rather than consumption tax is essentially the reason you give – – viz, income tax is progressive, and consumption tax’s benefits can only be realized if you use policy (ie tax credits) to compensate for its dramatically non-progressive structure. But you make the case far more strongly than I could have.
Not to belabour this discussion, but I’m going to return to the core point. The question I asked this week was, in essence, this: How can a government (and a society) best harvest the wealth generated by profitable corporations for the greater benefit? Are we better off a) directly taxing profits, or b) taxing those profits when they manifest themselves as salaries, wages, dividends, product sales, cashed-in shares or when they otherwise enter the economy? No, I don’t think there’s a worry about people “parking” earnings in corporations – – we want to tax things when they enter the economy; a profit is fiscally meaningless if it is not turned into income (cf my analogy about your house: If it doubles in value but you don’t sell it or use its capital to create income, then it isn’t of interest tax-wise).
So I’d like to see my proposal addressed with solid numbers: Are we better off taxing profit directly, or taxing it when it becomes income or consumption? Everything I’ve seen points to the latter, but please fire away.
Why do you not worry about people parking earnings in corporations? Surely anyone earning more than they consume would be happy to hold the extra income in a tax-free corporation.
Your definition of when money “enters the economy†is a bit arbitrary. If doctor X receives income and buys bonds, then it is taxable. But if doctor X incorporated collects the same income and buys the same bonds, then you think it’s “fiscally meaningless.â€
By maintaining a tax on the passive income of corporations, you could at least tax the interest on the bonds either way. However, the initial income would not be taxed until doctor X chooses to pay himself a dividend, sells doctor X incorporated, or dies. (In the last two cases, it would be taxed as a capital gain.)
Avon assures us that there are many solutions to this deferral problem, but I think that proponents of abolishing corporate taxes need to actually present one.
Wouldn’t it be taxed as “interest/investment income?”
The obvious solution to a tax deferral problem (if and when it becomes clear that there is one) is some kind of “deemed disposition” to force realization of capital gains and losses every so often. We already have this kind of provision in the Income Tax Act for holdings through trusts, (every 21 years), so it would be pretty easy to modify it to apply to individuals.
On the broader question of what kind of tax system we should try for, most economists will tell you that consumption taxes are most efficient. See for example:
(http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2008-03_gst.pdf)
The only good argument in favour of a progressive individual income tax is that it reduces after-tax inequality.
The question of how the tax system should be reformed therefore depends on the relative weights that you apply to efficiency (growing the economy) and equality (getting the after-tax income distribution that you’ve decided, on other grounds, is best).
This is why the answer that you get depends on which economist you ask.
If corporate tax cuts have not lead to increased investment or jobs, what is the theoretical explanation for this? It’s possible to use standard economic analysis to give an answer: much of corporate profits are economic rent, also known as monopoly profits. Taxing them or untaxing them has very little effect on the behavior of corporations – on their decisions about whether to invest in productivity or hire new workers.
Mainstream (aka neoclassical) economics de-emphasizes the concept of monopoly power and economic rent simply by assuming that markets tend towards perfect competition and in the long run, surplus profits get competed away. But what if this isn’t the case? What if companies are able to consistently earn economic rents through their sheer market power or through controlling the laws of the land? In short: rent seeking.
The economist.com says this about economic rent: “Reducing rent does not change production decisions, so economic rent can be taxed without any adverse impact on the real economy, assuming that it really is rent.”
http://www.economist.com/research/Economics/alphabetic.cfm?letter=R#rent
Hi everyone – I’ve responded to some of Doug’s points here
http://www.progressive-economics.ca/2011/04/19/saunders-and-the-value-of-cit-cuts-part-i/
(time for a new post!)
why not just get rid of the PIT and CIT, hike the VAT and let the economy spread the gains from reducing the CRA and tax accountant workforce by 90% (which i’m sure is in the tens of billions per year in savings). the government could still tax luxury items outrageously thus creating a tax on the rich. in the end, i’m everyone would win: Canada would solve its productivity problem due to the best taxation in the OECD esp. when compared to the US, we’d experience major savings in administration costs and we’d have a workforce ready for all FDI we’d receive from 0% income tax.
its sad that politics gets in the way of an obvious decision.
Doug, I may not be understanding which income you meant by “it.†The inflow of income to the incorporated medical practice would not be taxed at all without a corporate tax.
Income left inside the corporation would increase the corporation’s value. This extra value would be taxed as a capital gain when the doctor sells his corporation or is deemed to have sold it upon death, emigration, or some periodic deadline as proposed by rcp.
What I’m hearing from England is that they’re in worse shape than Canada in terms of progressivity.
Perhaps what would be “fair” would be to charge corporations a sales tax based on point of final sale.
And there’s no good reason AFAIK for not requiring any body that sells product within a country to support employment in that country.
Or requiring corporations to pay for the use of courts, etc. when someone sues them. Or maybe they should lose their capacity to be sued as well.
And of course, making people pay tax on utter necessities such as water and heat isn’t inherently regressive … so neither wll a tax twice as big. No one in their right mind, of course, would suggest that provinces will drop their component of HSTs. Perhaps they should, though, so those useless people on welfare will have to work for their water (and pay for their pee, too, since the water-and-sewage rates assume everything that comes out of a tap goes down a drain).