"Women are persons in matters of pains and penalties, but are not persons in matters of rights and privileges."
Traditional British common law held that women and men were inherently unequal. Today, the equality of men and women is enshrined in the Canadian constitution, and we face a different legal challenge:
Corporations are persons in matters of rights and privileges, but are not persons in matters of pains and penalties.
Yet the pains and penalties of corporations are restricted by the doctrine of limited liability.
Advocates of the elimination or reduction of corporate taxes argue that corporations don't pay taxes, people do. There is no need to tax corporations, since all corporate income is eventually paid out to shareholders, employees, or other stake-holders, at which time it can be taxed.
Yes, all income that a corporation earns is passed onto shareholders or employees.
But all liabilities that a corporation incurs are not. A corporation has limited liability. Its shareholders have limited liability. This is a problem when high costs come at the end of a production process in the form, of, say, a few tailings, the odd landslide, an oil spill, gas leak or perhaps a tailing pond or two. If the resources have already been extracted and profits paid out to shareholders, a company has every incentive to declare bankruptcy and walk away from the problems. Private profits; public costs. In the end, you and I pay.
One good reason to have corporate income taxes is to make those who benefit from corporate activity pay for the externality it creates: the collective risks society faces as a result of limited corporate liability.
This is especially true if the owners of the corporation are not resident in Canada for tax purposes, and do not contribute to the cost of such goods through their own taxes.
Another argument that is made against corporate taxes is that these taxes are passed onto the consumer in the form of higher prices. But so what?
Corporations benefit from public infrastructure and public services. For example, this weekend many Canadians will be heading towards their local ski hill - and driving on roads financed out of tax revenue. Without roads (and snow plows), the ski hills would have few customers. It is reasonable to ask the companies that run the ski hills to contribute to the cost of building roads. Yes, they may pass those costs onto their consumers - but that's fair too. Those consumers are the ones who are benefitting from the road being in place, not the folks relaxing at home by the fire.
Moreover, businesses in general, and corporations in particular, enjoy so many tax advantages that I find it hard to see why anyone would advocate making incorporation even sweeter.
Employees have few opportunities to deduct every day expenses from their taxable income. But become self-employed, or incorporate...
That new ipod touch? The personal organizer and calendar functions mean that it is clearly a business expense. A new car - necessary for travel to and from work. Expensive veterinary surgery? The dog is a guard dog, used for home security. The self-employed have more opportunities for understating their income, either through not reporting receipts or by overstating expenses. Herb Schuetze estimated a little while ago that, in Canada, the self-employed understate their income by 11 to 23 percent.
There is a large literature on the interaction between tax evasion, tax rates and self-employment, and people have different views on the topic. My gut feeling is that - as one recent paper put it - "small business owners have greater means to shift income between different income sources in order to avoid taxation."
Incorporation provides even greater tax benefits than self-employment. Basically, a a corporation works a lot like one big unlimited registered retirement savings plan. If a comfortably off Canadian earns $1 of employment income, she will typically have to pay taxes of 40 to 50 cents on the dollar. That gives her only 50 or 60 cents left over to invest - and less invested means smaller returns. If she earns $1 of business income, however, that is taxed at the much lower small business tax rate. If she wants to save the income, she just keeps it in her company. With that lower tax rate, she has much more to invest than a person with employment income, hence can generate higher returns.
In the Canadian context, incorporation has another benefit: it permits income splitting. Just make ones spouse a shareholder in ones company, and pay him/her dividends. The income is then taxed at the spouse's marginal tax rate, which again generates significant tax savings.
The evidence suggests that people respond to the tax advantages offered by self-employment. Every reduction in corporate tax rates increases people's incentives to structure work in the form of self-employment rather than employment. The income tax base is eroded on two fronts: (a) less revenue is raised through taxes on existing corporations and (b) firms and workers structure contracts to generate as much self-employment and as little employment income as possible, opening up further opportunities for tax avoidance.
Taking a long cold hard look at corporate income taxes, there is only one sensible response - to say:
"I'm a corporation, and so's my wife."