Here is my first recommendation to the NDP on corporate income taxes: accept the fact that previous NDP positions have been - to put it kindly - painfully amateurish and should be discreetly tossed into the Dumpster of Disavowed Doctrines. It's tabula rasa time, and the long path back to reality-based policy starts below the fold.
The first thing to discuss is efficiency issues; happily, much of this material was covered when we discussed the advantages of the GST. Briefly put, higher corporate taxes reduce the after-tax rate of return on investment, and this in turn reduces investment, employment and income below what they might otherwise have been.
Of course, we might be prepared to pay this price if increasing corporate taxes reduced inequality, and there are apparently people who believe that this is in fact the case. As far as I can tell, this argument goes along the following lines:
- Corporate taxes are applied on profits.
- Profits go to capitalists.
- Corporate taxes are paid by capitalists
- Capitalist = rich person, therefore
- Corporate taxes are paid by rich people
The first two statements are of course true, but everything else is wrong:
Corporate taxes are not paid by capitalists. Here we have to think about the incidence of corporate taxes. If the owners of the firm can pass the tax along in the form of higher prices, lower wages and/or reduced employment while maintaining the same after-tax rate of profit, then the burden of the corporate tax is borne entirely by workers and consumers. And if firms must compete for investment in an integrated global capital market - as is the case of firms operating in Canada - then that's exactly what will happen. Even if they're not the ones who write the cheque to the Receiver-General, the people who really pay corporate taxes are consumers (in the form of higher prices) and workers (in the form of reduced wages and employment). For more on this point, see Who pays corporate taxes? and Why progressives should support reducing corporate tax rates.
Capitalist != rich person. One thing that an increase in the corporate income tax will do is to induce a one-time fall in stock prices. If you think that this advances the progressive agenda, remind yourself of the following:
- The increase in inequality at the high end of the income distribution is generated by wage income, not by the value of their capital holdings (see Lesson 1).
- A reduction in stock prices hits the values of pension funds as well. An ethical framework that treats a retired school teacher as equally deserving of punishment as Scrooge McDuck is perhaps something that should be rethought.
Peter Lindert's book Growing Public makes the point that big governments do not have the luxury of indulging in sentiment in designing tax policy, because their mistakes have correspondingly large consequences. This is a lesson that has been learned by successful social democratic governments - including the one in Manitoba, which has recently realised that lower corporate tax rates are not inconsistent with progressive goals. Here are graphs of the statutory corporate income tax (CIT) rates, the effective rates and the marginal effective rates in various rich countries plotted against the levels of social spending:
Here are the effective rates (taxes as a percentage of the tax base after deductions):
And here are the CD Howe estimates for the marginal effective tax rates (the tax on an extra dollar of profits):
As can be seen in the first graph, the governments of Jean Chrétien, Paul Martin and Stephen Harper have implemented several rounds of corporate tax cuts since 2000, and future reductions have already been announced. These will bring us down to the levels of the Nordic countries, and that's probably enough for now. So my main recommendation for the NDP when it comes to corporate tax policy is to say nothing. No promises to cut taxes, no promises to rescind the ones previously announced. Saying nothing is better than saying something stupid, and that's probably the best we can hope for for now.
This is part of a series:
- Economic policy advice for the NDP, Part I: Inequality
- Economic policy advice for the NDP, Part II: Defending big government
- Economic policy advice for the NDP, Part III: The GST
- Economic policy advice for the NDP, Part V: Give money to low-income households
- Economic policy advice for the NDP, Part VI: Climate change