Ontario’s Corporate Tax Debate
Today’s Ottawa Citizen (page A15) features the following op-ed on Ontario corporate taxes. I have added links to references.
I recently discussed this issue on TV Ontario:
Corporate Taxes are Low Enough
By Erin Weir, Ottawa Citizen, September 27, 2011
Corporate taxes are a major dividing line in Ontario’s election campaign. Liberals and Conservatives would slash the provincial general corporate tax rate to 10 per cent. New Democrats would restore it to 14 per cent.
The difference between these proposals is nearly $2 billion per year of provincial revenue, making corporate taxes the most fiscally significant election issue. More funding for needed public services is clearly desirable. But how would tax changes affect the private sector?
Ontario already has a 10-per-cent tax rate for manufacturing and processing. All three major parties would maintain that lower rate. New Democrats and Liberals would modestly reduce the small-business rate.
At issue is the general rate applicable to banks, private utilities and large insurance, construction and service companies. Unlike manufacturers producing tradable goods, such firms must generally be located in the same place as their customers. Yet they supposedly need lower corporate taxes to be “internationally competitive.â€
The federal corporate tax rate is falling to 15 per cent next year. If Ontario restored a 14-per-cent provincial rate, the combined rate would be 29 per cent.
By comparison, the U.S. government levies a 35-per-cent federal corporate tax. American companies pay this rate, minus corporate taxes already paid in Ontario, on profits repatriated from here to the U.S. Cutting Ontario’s combined rate further below 35 per cent simply causes these companies to pay more tax to Washington.
American state governments also levy corporate taxes, producing combined rates around 40 per cent in the Great Lakes states. A 29-percent combined rate would keep Ontario at the low end of the world’s other major economies: Japan (40 per cent), Brazil (34 per cent), India (34 per cent), France (33 per cent), Italy (31 per cent), Germany (29 per cent), the United Kingdom (26 per cent) and China (25 per cent).
What about competition within Canada? When Ontario’s 2009 budget proposed a 10-per-cent provincial corporate tax rate by 2013, other provinces may have appeared to be heading in that direction. But the tide has since turned against provincial corporate tax cuts.
In British Columbia, both the government and its official opposition have proposed increasing the provincial rate to 12 per cent. Outside of Ontario, the only provinces at 10 per cent will be Alberta and New Brunswick. All other provinces are maintaining rates between 12 per cent and 16 per cent.
In any case, businesses have little latitude to shift reported profits to lower-tax provinces. The Canada Revenue Agency apportions each company’s taxable Canadian profits among provinces based on the actual location of its sales and employees.
Advocates of corporate tax cuts also claim that they will spur job-creating investment. In reality, corporate tax rates have very little effect on investment decisions.
A company will borrow money to finance new investment only if it anticipates an investment return at least equal to the interest rate. Since interest payments are deductible in calculating taxable profits, corporate tax applies only to profits in excess of the minimum return needed to justify the investment.
Similarly, a company will issue shares to finance investment only if it expects a return greater than any dividends due on the new shares. Federal and provincial dividend tax credits refund corporate tax on profits paid out as dividends to Canadian shareholders. Corporate taxes only skim off revenue above this threshold.
Therefore, corporate taxes have no effect on investment financed by debt or Canadian equity. As noted above, cutting the federal-Ontario rate further below the U.S. rate does not affect investment from American corporations.
The past decade of corporate tax cuts has been unimpressive. The combined federal-Ontario rate was slashed from 45 per cent in 1999 to 30 per cent in 2010. Over the same period, investment in machinery and equipment declined from 8.3 per cent to 5.5 per cent of the province’s gross domestic product.
Rather than investing in productive assets, corporate Canada has been accumulating record amounts of cash. Statistics Canada reports that private non-financial corporations now hold $477 billion in cash. There is no reason to expect that giving them more cash through further no-strings-attached tax breaks would boost investment and employment.
A far cheaper and more effective approach would be to provide incentives directly tied to new investment and hiring. Ontario New Democrats have proposed tax credits available only to corporations that invest and create jobs in the province.
Increased corporate tax revenue should also fund public investment, which can help offset the lack of private investment. Improved provincial infrastructure would attract private capital. Statistics Canada concludes: “Between 1962 and 2006, roughly one-half of the total growth in multifactor productivity in the private sector was the result of growth in public infrastructure.â€
International and interprovincial comparisons do not support claims that Ontario must cut corporate taxes to compete. On the contrary, modestly increasing the general corporate tax rate and using the proceeds to fund targeted tax credits and public investment would strengthen the provincial economy.
– Erin Weir is an economist with the United Steelworkers union’s Canadian National Office.
UPDATE (October 7): Quoted by NOW Magazine
One very basic thing that tends to mislead people is that corporate taxes are often treated as analogous to personal income taxes, when they aren’t remotely. After all, income tax is a tax on income; corporate taxes are taxes on profits. If people only had to pay the kind of taxes corporations do, at the end of the year we’d figure out how much more savings we had than the year before and pay a tax on the difference. Which is to say most of us wouldn’t pay anything.
This in turn is why people are often all “How can we tax corporations when the economy is in tough shape? They’ll all go under!” when of course the ones in danger of going under aren’t paying any tax no matter what the rate. We know we’ll be in danger of going under if we are taxed heavily even as we lose income in economic tough times, and we imagine corporate taxes work the way ours do, even though they don’t remotely.
Pro-corporate media commentators who presumably know better often talk as if it were a true analogy, the better to fool people into buying their weak case for corporate tax cuts. Bastards.
Erin, I want to thank you, Jim, and all the folks at the PEF for the work you’ve done on this topic. I was on local access last night shilling for the NDP, and made reference to the report Jim wrote and published through the CCPA, and the Treasury transfer effect that Erin has talked about. I think the NDP will come out the clear winners on this issue thanks to all the research you folks have done. It’s about time we killed this harmful truism.