How much revenue can you get from raising the corporate tax rate?

How much would an NDP government gain?


 

On the topic of Thomas Mulcair’s approach to tax policy, Erin Weir tries to figure out how much a point of corporate tax is worth. He settles on somewhere between $1.6 billion and $1.7 billion, but, as he notes, that’s really only where the debate begins.

On the other hand, raising corporate tax rates arguably could reduce taxable corporate profits by discouraging profit-generating investments and/or by encouraging corporate tax avoidance. The significance of these supposed dynamic effects is hotly contested. But we should at least get our static estimates right before delving into that debate.

Indeed, Stephen Gordon delved into this a year ago.

The CLC estimate is what you get if you assume that the only behavioural response to an increase in corporate tax rates is that firms’ CFOs will grit their teeth and put bigger numbers on the cheques they send to the Receiver-General. But in a world in which multinationals file 57,000-page tax returns, one can only marvel at the faith in human nature among those who would make policy based on such a belief. People respond to incentives, and if you make it more costly to report profits in Canada, firms will do less of it. Partly because they will make less profits as investments decline, partly because firms will shift income away from Canada … If you’re a government looking to generate a noticeable increase in revenues, you may as well forget about corporate taxes.

For more of Stephen’s calculations see here and here.

In 2011, the NDP booked annual revenue increases of $5.9 billion, $8.6 billion, $9.3 billion and $9.9 billion from raising the corporate tax rate to 19.5%.


 

How much revenue can you get from raising the corporate tax rate?

  1. “raising corporate tax rates arguably could reduce taxable corporate
    profits by discouraging profit-generating investments and/or by
    encouraging corporate tax avoidance.”

    So when we reduced corporate taxes Canada experienced increased investment and tax compliance? Why are we cutting spending if the tax cuts rocketed us to prosperity?

    • What are business profits and what are they used for? Corporations are in the business of making money, and using that money to make more money. If you put more money into the hands of corporations they will find ways to use it profitably. This means investing more money in the economy, investing more in research and hiring more people.

      This idea that you can raise more money for government programs by taking more from corporations is fallacy. A tax on corporations is a tax on people; it is a tax on employment. Once you accept the fact that corporate taxes (just like income and consumption taxes) are taxes on people it makes one look less favorably on increases in government spending.

      • The real fallacy is that any or all taxation is bad. Taxation that requires businesses (investors) to pay an economic rent for resources, for infrastructure use and for the social and environmental costs of running a business sustains the infrastructure to support further investment and to mitigate the negative impacts.

        Similarly, not all government spending is economically unproductive. A lot of private sector businesses in Canada, construction for instance, are heavily reliant on public sector investment in transportation, health and education infrastructure. Even more reap indirect benefits from investment in those sectors.

        In any case we aren’t talking about a decision to have taxes or not, Mulcair is calling for a rate of corporate taxation that we had previously and that was comparably productive to the rate we have now.

        • I wouldn’t say that believing any or all taxation is bad is a fallacy, I think of it more as a necessary evil to provide some of the required services you have mentioned; a necessary evil that produces negative effects in the form of economic drag.

          Returning to Mulcair’s position, what is important is that corporate tax rate and corporate tax revenue are absolutely not a linear relationship as many would believe. This is made very clear in Stephen Gordon’s analysis as mentioned above.

          So essentially what Mulcair is advocating is that we increase economic drag without knowing whether or not this will result in an increase in revenue.

          • And the point I was alluding to in my original comment was that when the government cut corporate (and other) taxes it induced a government deficit without knowing whether it would produce a corollary benefit in private sector investment and jobs.

          • This chart, given in Mr. Gordon’s analysis linked above (and at the bottom of this comment), does not fit with your assertion that the reduction in corporate taxes resulted in less revenue. In fact, corporate tax revenue seems independent of corporate tax rate but dependent upon the general state of the economy.

            So with evidence that corporate tax revenue is not dependent on the corporate tax rate, the logical mind prefers that the rate be kept low to avoid the possibility economic drag. Only the ideological mind would prefer that the rate be raised, with the possibility of creating additional economic drag, without the guarantee of increased revenue.

            http://worthwhile.typepad.com/.a/6a00d83451688169e201348851a7de970c-pi

          • But the deficit is real and it wasn’t just the GST cut, it was also a result of reducing the corporate tax rate, and yes, less income and corporate tax because of the recession. Cutting the corporate tax didn’t improve the position of companies that were losing money, just the ones that were already profitable.

            We impaired the ability of the public sector to contribute to the economy based on a theoretical benefit that would occur if profitable companies reinvested. We already know that Canadian companies have a dismal record of investing in R and D, and we know that the wildly profitable banks have largely engaged in cost cutting measures, so where is the economic boom going to come from by letting them sock away more?

        • I agree, good governemtn is needed. But given so little money actually goes to infrastructure and the good stuff, well, lets talk about the budget looking at all spending and waste.

          Did rusty subs help you? Did Air Canada union lobby money for pension bailouts help you? Do the defective F35s help you? How does general administration costs of 29.5% of every tax dollar help you? Does government bloat How did banker bonuses for bailouts help you? How did taxing non-union workers to bailout GM and CAW help you?

          Fact is they steal from you and I and have no residual value like a bridge. They always use what little they do for us to justify ore taxes for the bloat that benefits us not.

      • Investors get those profits and taxed again on them. But hey, I don’t expect the economically stupid and envy driven Canadian idiots to understand. You and I see this, but many Canadians just think with fear, envy and greed. Easy for over sized corrupt governemtn to bilk us all.

      • “If you put more money into the hands of corporations they will find ways to use it profitably. This means investing more money in the economy, investing more in research and hiring more people.”

        While you’re at it, perhaps you can explain how all the estimated billions in so-called “dead money” that corporations have, by many authoritative accounts, squirreled away fit into your grand theory of corporate profits raising all boats.

      • Or they might find ways to waste it.

        After all, one of the reasons corporations are thought of as generally successful is that the failures go away.. but what those extolling corporate virtues so often forget is that the failures go away *with the resources invested in them*.. those get wasted.. just as much as any bad government program.

    • To your first question: yes, Canada has experienced increased investment and tax compliance.

      To you second question: we are not cutting spending. Look at the governments expenditures over the last 10 years, it hasn’t gone down once.

  2. If the NDP is really interested in raising significant revenue to pay for programs, the most efficient way by far would be to raise the GST rate. But I’m betting they won’t have the courage to touch that idea with a barge pole.

    • Agreed, we would be much better off if government would impose a revenue neutral shift from corporate and income taxes to consumption taxes. Unfortunately for us, doing so would be a political nightmare.

      • Yup, I agree. It would be interesting to know why it is that European and especially Scandinavian countries have been able to have such high consumption taxes without their politicians getting tarred and feathered and guillotined for it. I suppose it has something to do with history and culture, and the fact that once you’ve got such a system set up, the sky doesn’t actually fall down etc.

        • Unless I’m mistaken I believe that most European countries using this model require businesses to include consumption tax in the price tag of items. The system we have where GST is added onto the price of goods and services on top of the price tag makes it painfully more visible than other forms of taxation.

          Thus, although it makes economic sense to shift tax revenue from corporate or income taxes to consumption taxes, doing so would be political suicide. I believe this is why Harper lowered GST, which would not have been the choice of economists, rather than lowering income taxes.

          To make matters worse I believe that pricing regulations are provincial jurisdiction, which makes it almost impossible to adopt the European model.

          • All good points, thanks for that.

          • But like most government lies, it is an incremental and not a substitute tax. And given all the most economically troubled modern nations all have government bloat, it is obvious this model isn’t sustainable, just ask Greece, Iceland, Cyprus, Spain et al.

            Real issue is we can’t afford government consumption that is in excess of productions ability to support it. So more and more wealth is going offshore for better returns than (on average) Canada’s pathetic performance. TSX is down, banks pay far less than real inflation+taxes for money, the liberal economics negative value economies are a race to the bottom. Big fat hyper-taxing government is going to fail, just a mater of time. Productive workers and investors need better returns.

      • You should see the consumption taxes you already pay. Over $40 billion to the feds, fees, GST and provinces extra. That is the tariff stuff, food, clothing even the poor have a huge hidden tax burden.

        Look it up:

        http://www.cbsa-asfc.gc.ca/trade-commerce/tariff-tarif/2013/

        All sorts of hidden taxes. And don’t forget, rate tables can compounds so 18% here, 16% there is 34% plus GST/HST and possibly provincial tariffs. A winter jacket might have 60% tariffs and duties, mozzarella cheese 294%, 232% beef, dairy can be 300%, autos and more.

        And the above tax tables are for “preferred” nations like NAFTA, if no trade agreement exists, taxes over 100% are common.

        Government tax greed gets you coming and going.

        You earn $100, $40 to income/EI/CPP, $10 to property/utility taxes, to buy $50 of gas tax in, of $20 is fuel/GST taxes, then to get $30 of gas so you can go to work.

        You make $100 for $30 of gas and the government gets the rest.

        • But that’s the problem with our system compared to certain systems such as Scandinavia. A lot of tax wonks like their system because it’s a lot more straightforward — the big hit is bundled into the VAT, rather than the death of a thousand cuts approach you describe. Fair warning, though — the Scandies have tax receipts as a % of GDP (which is the standard measure of a country’s overall tax burden) in the 48-54% range last time I checked, which is right near the very top of the pile. Canada’s rate last time I checked was right smack in the middle of the OECD average, around 35% or so.

    • We would have been far better off if Tubby hadn’t cut the damn thing in the first place.

      • Umm, yeah, I don’t think anyone here is disagreeing with that.

      • Had no choice. Tax companies and investors and they leave….and less jobs. Why do business in Canada if you don’t have to? We are a high cost low productivity producer and taxes have a lot to do with it.

  3. Before the inevitable posts about how the way to combat “corporate tax flight” that results from increased rates is to tighten loopholes and increase enforcement, I suggest adherents to this approach do one thing before they post – call up a large Bay Street law firm and ask what their senior tax counsel charge per hour.

  4. How about more discussion about affects on labour of high corporate taxes left wing types are so keen on. Labour economists and the like spend much time coming up with schemes on how to steal other people’s money, why don’t they focus instead on how to actually improve labour, working class.

    Doug Saunders – Abolish Corp Tax:

    In fact, the strongest arguments against corporate tax come from the left. They were most eloquently expressed by Robert Reich, the economist who was considered on the far left of Bill Clinton’s cabinet during his tenure as labour secretary. Corporate tax, he noted, is fundamentally regressive: It shifts wealth to the rich. And not just because General Electric avoids it and corner shops don’t. Since corporations do not physically exist, corporate tax is ultimately paid by individuals – and, as many studies have shown, those individuals tend to be the company’s workers more often than its shareholders or executives.

    There is another strong argument against corporate tax: It gives businesses far too much power in politics, law and society.

    http://www.theglobeandmail.com/commentary/abolish-corporate-tax—it-has-been-a-worldwide-failure/article624107/

    • I like another of Saunders’ columns better (can’t find
      a link) in which he tells the corporate clan sitting on
      wads of cash to use it or lose it.

      • Or go offshore. Hey, you suckers supported NDP to bailout GM, so GM could pay Magna the 1.7 billion they owed. Now Magna takes it offshore to make a better return. Fact is corrupt Canadian statism bloat played you for a fool and you still don’t realize it. But you and I get the taxes of this bailout buddy nonsense.

  5. What should really happen is Canadians as a whole should get the same types of tax avoidance schemes that corporations use. We should be able to move numbers around on a page and by doing so pay far less in taxes than Revenue Canada wants us to. It’s either that or corporations could start paying their share instead of constantly weaseling out of it. All it would take is a government with the guts to do it so…we’re screwed.

    • You can get far better tax avoidance than any corporation. How much have you in your TFSA? TFSA is like a legal tax haven, available to all. No tax paperwork, no tax on inflation gains, no tax on dividends…..TFSA are better if you can find some stock in the TSX worth owning. I say this as TSX on average is a loser, as Canadian productivity and investor returns are too low to consider 95% of them.

      Part of why the governemtn propaganda on offshore accounts is more people ar doing it and giving up on the Canadian economy as their “Trust” has been shattered.

      This fall it will become economically a good move for me to kiss this country good bye as I will save huge taxes when I go offshore to join my offshore investments. As once I live offshore, no more taxes on foreign income go to Ottawa.

      • So long. You won’t be missed.

      • Why do you even participate in debates like this if you care so little about Canada?

    • What would you say should be corporate Canada’s “fair share”. You socialists always throw that term around, but you’re never able to define it. Should they be paying a 50% rate? 90%? Define “fair”, lest your entire comment be completely meaningless.

  6. Funny the socialist tax greed. The more you tax companies, the less they will pay workers. Or worse, just move elsewhere to escape governemtn tax greed. Most people don’t realize it, but governemtn is the most expensive item in your life. Even mortgages are cheaper than the income/employment/property/utility/hidden tax greed and inflated pricing it causes.

    Yet we question little on how they waste $280,000,000,000+ a year, crown corp and pension shortfalls hidden of course.

    NDP fail to realize that companies pay less taxes for a reason, as it is taxed AGAIN in inflation and dividend taxes. Yep, companies earnings are double taxed and when you work the math, it is taxed more than income tax.

    But hey, a Mulcair renewed mortgages 11 times for more debt isn’t an economics clear thinker. You think with a 6 digit partially tax free no CPP/EI income for so long, he would be debt free. But hey, he loves other peoples money, our money right?

    Now you know why more people like me have gone offshore. As tax greed grows, less economic liberty for those that remain.

  7. One observation is that, generally, corporate tax cuts/increases, have been matched with dividend tax increases/cuts, to avoid double taxation of corporate income (ironically, therefore, the Tories have been steadily increasing the tax rate on Canadian shareholders, which neither the Tories nor the NDP have been keen to advertise). If the proposed NDP corporate tax increases followed that practice, any estimate of increased corporate tax revenue would have to be offset by the decreased shareholder level tax revenue.

  8. Taxes from corporations are already taxed twice. But mulcair is too stupid to realize investors have their companies taxed and taxed again as personal income tax dividends.

    But socialist idiocracy and economic stupidity with tax greed know no end.

    Tax companies more, they will pay you less or leave for China if they can.

    • Christ.. this old saw again?

      Corporations aren’t taxed twice any more than employees are. Yeah, when corporations make money, they get taxed, and yes, when they pay money to shareholders, that money gets taxed too.. just like it does when they pay it to their employees.

      Hell, if anything, employees get taxed more often because, unlike corporations, they can’t deduct GST from their inputs.