The corporate tax on workers and consumers

One of the NDP's lines on the budget - the very first words spoken by Jack Layton in his reaction during the CBC coverage - is to denounce the continuation of the corporate tax rate reductions that began under Jean Chrétien's government in 2000. (The basic rate was 28% in 2000, is at 18% now and the plan is to go to 15% in 2012. The provinces have also been bringing down their rates.) Here are the introductory sentences from the NDP's corporate tax platform:

During elections, Liberals and Conservatives don't talk much about corporate tax cuts. But come budget time, the biggest priority for Liberals and Conservatives is another round of tax giveaways to Canada's wealthiest corporations.

Do you see something in there that doesn't make any sense in a discussion of corporate taxes? I'll get back to what it is later, but first I want to quote something from this delightful op-ed (h/t Tim Worstall) by Andrew Leigh, an economics professor at Australian National University. It's written for an Australian audience, but this part could run in a Canadian newspaper with only minor changes:

Promising to raise company taxes has an visceral appeal to any ambitious opposition. Perhaps some voters will think that they will be borne by the companies themselves, leaving all living persons miraculously unharmed. Slightly savvier citizens might think that company taxes are entirely borne by investors.

A central tenet of public finance, however, is that the entity that has the legal obligation to pay a tax is not necessarily the one that bears the burden. For example, payroll taxes are levied on firms, but we know that they are mostly borne by workers. Raise payroll taxes, and firms cut wages. Lower payroll taxes, and most firms will pass on a pay rise.

The GST is another case in which the burden of a tax doesn’t fall on the entity that pays the tax bill. Although the law says that the tax is levied on those who supply goods and services, it is customers who end up bearing most of the burden.

Which brings us to company taxes. For decades, economists have argued over how the burden of company taxes are shared between investors, employees and customers. In the short-term, it is difficult to change prices and wages, so a higher company tax rate will be paid in the first instance by shareholders.

But over time, the burden is likely to shift. Investors are a footloose bunch, with the ability to shift their money into sectors like real estate where they can avoid company taxes. For an open economy like Australia’s, higher corporate income taxes will lead investors to buy foreign shares instead (which is why small countries have been cutting company tax rates over recent decades). To keep their investors, companies may respond to the tax rise by raising revenue and cutting costs.

What will a company tax rise do to prices? While the evidence is thin, theory suggests that companies will be most likely to put up prices on consumers when they do not face competition from importers. So an Australian shoe manufacturer (do we have any left?) may be unable to shift the burden to consumers. But a fast food outlet will have greater capacity to raise prices.

In the case of wages, the empirical evidence is stronger. In a recent review of the literature, William Gentry (Williams College) concludes that most of the impact of a corporate income tax rise falls on workers. Increase company taxes by 10 percentage points, and wages fall by 6-10 percent.

I've made this point before (here, here and here), but not as well as this.

By now, it should be evident that the problematic phrasing in that quote from the NDP site is:

Canada's wealthiest corporations

Corporations can be big, they can be profitable, and they can be big and profitable. But they cannot be wealthy, for the simple reason that corporations are not people. Corporations are not wealthy; they are a form of wealth.

Comments

[RSJ]

That is why the most effective taxes are income taxes -- highly progressive income taxes. 70%, 80%, etc.

As long as there is no discrimination, then asset holders cannot punish one business over another for not delivering returns -- the returns are being delivered, after all, and the best the investor can do is sell one asset to purchase another. And as the high rates do little to dampen demand and do much to discourage windfall seeking, the externality is a huge win for economic stability and the plight of the middle class.

[tyronen]

Have the existing cuts in corporate taxes actually been passed on to consumers or workers? Surely it should not be hard to find evidence for this, if that actually happened.

The NDP obviously believes that most of the cuts have been passed on to shareholders. If you know of studies to disprove this, specifically in the context of Canada in the 2000s, please share.

But even that wouldn't be enough to dissuade the NDP. You'd have to prove that corporate taxes cost consumers/workers *more*, not the same, than revenue-equivalent increases to the GST or income taxes.

Remember that the NDP is a leftist party. They want a higher level of social expenditure, which requires a higher level of taxation. For them to openly call for increases in income and sales taxes would be political suicide. So if they can punt by raising corporate taxes instead, I'm fine with that, UNLESS the impact is greater.

[Stephen Gordon]

Why is it political suicide? The mix of low corporate taxes and high consumption taxes is what makes the Nordic model work.

Those countries are governed by successful social-democratic parties that win elections. And then get re-elected.

[westslope]

Corporations own assets, so in a sense they do hold 'wealth' in the same way that political jurisdictions can be measured by current wealth. Layton just doesn't want to remind people that many of his supporters are salaried people with above average incomes whose pensions consist of corporate 'wealth'.

The NDP is too much about envy and righteous process and not enough about results. The comparisons with Scandinavia should be warning enough but I suspect that the NDP constituency is largely unaware of what social democracies are doing elsewhere.

If neighbourhood and social capital-type effects can drive sectors like the IT and semi-conductor sectors, then cutting corporate taxes makes sense by helping to bring the money counters (e.g., the Chief Financial Officer) and the hands-on talent closer together. There is nothing wrong with head-office jobs.

[RSJ]

The Nordic model doesn't work because of high consumption taxes, but high income taxes of households.

The Nordic nations exclude the following from GST/VAT taxes:

medical services
housing costs
transportation costs
food costs
education
social services
financial intermediation services

So I wouldn't say that they have high consumption taxes, or that this is some secret to their success.

They do have much higher income taxes overall, both statutory and effective. That is where they stand out.

http://ic.pressflex.com/249.pressflex.net/images//1313.photo.jpg

Consumption taxes put downward pressure on prices, but high marginal rates put upward pressure on median wages. The combination of the two limits inequality and inflation. If the main problem is a shortage of demand, you don't care so much about consumption taxes. Capital is a pass-through. In all cases, you don't care about raising revenue, but limiting overall household income inequality, whether this takes the form of wages or capital income is irrelevant for purposes of maintaining aggregate demand.

[The Balf]

Never trust a guy with a moustache.

[Just visiting from macleans]

But they cannot be wealthy, for the simple reason that corporations are not people.

In the eyes of the law (American at least), corporations are indeed persons.

A legal person (sometimes referred to as a juristic person or a body corporate) is a legal entity through which the law allows a group of natural persons to act as if they were a single composite individual for certain purposes, or in some jurisdictions, for a single person to have a separate legal personality other than their own.[1] This legal fiction does not mean these entities are human beings, but rather means that the law allows them to act as persons for certain limited purposes—most commonly lawsuits, property ownership, and contracts. This concept is separate from and should not be confused with limited liability or the joint stock principle.[2] Also note that basic rights (like the rights to free speech and due process of law) do not necessarily follow from legal personhood. A legal person is sometimes called an artificial person or legal entity (although the latter is sometimes understood to include natural persons as well). Although the concept of a legal person is more central to Western law in both common law and civil law countries, it is also found in virtually every legal system.[3]

http://en.wikipedia.org/wiki/Legal_person

[Min]

"By now, it should be evident that the problematic phrasing in that quote from the NDP site is:

"Canada's wealthiest corporations
"Corporations can be big, they can be profitable, and they can be big and profitable. But they cannot be wealthy, for the simple reason that corporations are not people."

Well, south of the border corporations are persons with the right to own property. American corporations can be wealthy, thank you very much. ;)

[Just visiting from macleans]

An economics question. How does one know definitively that one is at the optimal tax level for corporations, or above it rather than below it?

A related question. Jack Mintz had recently undertaken some sort of study comparing Alberta's tax/royalty regime with neighbouring jurisdictions (Sask and BC) and some southern states. This was used by some as a justification for the Alberta gov't to recently lower royalty rates.

How is this any different than say Dalton McGuinty offering millions in subsidies to auto assembly companies to open an assembly line in Ontario, bidding against say Southern Carolina who are doing the same thing?

It seems to me the Jack Mintzes of the world would support lowering royalties in Alberta (to attract investment at the expense of BC/Sask) but would be against subsidizing auto plants. What's the diff?

[Declan]

"But they cannot be wealthy, for the simple reason that corporations are not people. Corporations are not wealthy; they are a form of wealth."

Huh? Corporations can own things, things that have value, and the definition of wealthy is owning things of value, so I'm not sure I understand the disagreement. If one corporation has $20B in the bank and another has $5 (assume all else equal), is there anyone in the country who wouldn't understand what you meant - and agree - if you said the one with $20B was wealthier than the other one?

Back on the main point, it seems to me that in the extreme case, if you were to reduce corporate taxes to 0, it would be (roughly) equivalent to the corporation having an infinite RRSP contribution limit, in the sense that the corporation could defer paying taxes on income until the income was (from the point of view of the corporation) consumed (e.g. via dividends). Now, maybe that would be a good thing, I'm not arguing that point one way or the other at the moment - just pointing out that treating a corporation as simply a pass-through shell for the owners overlooks some tax implications and it seems reasonable to think that, again all else equal, the NDP might prefer not to be offering such favourable tax treatment (extensive deferment of payment of taxes) to income gained via corporations.

Another concern is that people might shift their personal expenses inside the corporate shell as a tax dodge.

[Stephen Gordon]

If one corporation has $20B in the bank and another has $5 (assume all else equal), is there anyone in the country who wouldn't understand what you meant - and agree - if you said the one with $20B was wealthier than the other one?

Try it this way:

If one safe has $20B in it another has $5 (assume all else equal), is there anyone in the country who wouldn't understand what you meant - and agree - if you said the safe with $20B was wealthier than the other one?

Does that make sense? Why or why not? The ones who are wealthy are the people who own the safe. And if the ownership is divided among a sufficiently large number of people, they won't be particularly wealthy, either.

[Christopher Hylarides]

One has to remember that the NDP's base are anti-capitalist at the core. They're not interested in "nordic models", but still see the world as a place where the wealthy takes advantage of everybody else. You only got rich because you cheated other people out of money. It also involves clinging to the Marxian labour theory of value that if a company makes a profit, it's stolen it from the workers by not paying them enough. If decreasing (corporate/payroll) taxes actually makes everybody else better off and you could clearly prove it, they'd still be against it on philosophical grounds. It's the reason they've never been federally elected. It's also the reason why your excellent "economic advice for the NDP" series will be ignored. :-/

[Just visiting from macleans]

If one safe has $20B in it another has $5 (assume all else equal),

The economists's ultimate black box. With a combination.

[Tim]

Some people seem to be confused with between a legal person and people that matter with regards to economics and welfare, i.e. natural persons. A corporation is only a legal person, an abstract entity that allows us to conveniently designate a group of real people who are cooperating together for business purposes. A corporation can only pay a tax on behalf of real people not for itself as all corporations are ultimately owned by real people. In reality the burden will also be shared between other people that the corporation interacts with, its employees (and indeed potential employees that it may have wanted to hire) and customers.

[Just visiting from macleans]

Same could be argued for "real people". They can only control finite resources during their lifetimes - at which point the control of the assets gets passed onto their future generations, or reverts back to the state (you can't take it with you). Pie slice trading.

[Christopher Hylarides]

A corporation is only a 'legal person' in regards to property and liability laws. If criminal acts occur, it's the people within the company that commit the crimes are liable (though the company itself can be financially liable as well).

[Mickey]

"it seems to me the Jack Mintzes of the world would support lowering royalties in Alberta (to attract investment at the expense of BC/Sask) but would be against subsidizing auto plants. What's the diff?"

The difference lies in the incentives presented to the taxpayer. Each is a form of lost revenue to the government, but one asks the taxpayer to employ some level of endeavour to realize the benefit and the other asks considerably less of the taxpayer.

So, on one hand the government should be indifferent - a lost revenue in the form of lower taxes is no different than a greater expense in the form of a direct subsidy. On the other hand, the taxpayer should be creating more economic value with a tax based subsidy.

This says nothing of how much simpler a tax cut is than a direct cash subsidy (not just in the immediate execution, but in the considerable time and effort a government and a taxpayer will need to exert in future years to adhere to the conditions of the subsidy).

[westslope]

Just visiting from macleans,

On your related question of royalty adjustments, yes, I agree Alberta and other jurisdictions are playing a profit-shifting game just like the one Brazil and Canada played over passenger planes, and just like the one various North American jurisdictions play with auto sector subsidies. James Brander and Barbara Spencer wrote the classic paper.

[Andrew F]

I think the only sense in which a corporation can be considered to be wealthy, and even it is a stretch, is when management is not acting in the interests of shareholders and using the corporation for their personal benefit. Even that sounds ridiculous.

It's like saying a pile of gold is wealthy. It's a thing. A corporation is also a thing. It makes its owners wealthy, but it cannot itself be wealthy.

[Victor Galis]

So are you implying that corporations could charge higher prices and pay lower wages, but are choosing to forego potential profits? It seems to me that you have to answer yes to that question if you mean to imply that a corporate tax would be 100% passed on to workers and consumers.

[renaissance costume]

This says nothing of how much simpler a tax cut is than a direct cash subsidy (not just in the immediate execution, but in the considerable time and effort a government and a taxpayer will need to exert in future years to adhere to the conditions of the subsidy).

[Just visiting from macleans]

This says nothing of how much simpler a tax cut is than a direct cash subsidy (not just in the immediate execution, but in the considerable time and effort a government and a taxpayer will need to exert in future years to adhere to the conditions of the subsidy).

How about if the subsidy to a car assembly plant comes in the form of accelerated CCA (or tax deferral) instead of a direct cash payment? This is what is done in the oil patch for large oil sands developments (1% royalty until the initial capital investment by the company is fully paid off, then 25% thereafter - since changed to a sliding scale).

If I'm doing the go-forward economics on an assembly plant investment using risk adjusted NPV, I should be indifferent to whether I am subsidized by a government cash infusion, or deferred taxes.

[Declan]

"if one safe has $20B in it another has $5 (assume all else equal), is there anyone in the country who wouldn't understand what you meant - and agree - if you said the safe with $20B was wealthier than the other one?"

Are you arguing with me, or trying to help me prove my point? If you put the question about the safe to people they'd say, of course a safe can't be wealthy. If you put the question about the corporation, they'd say, of course a corporation can be wealthy.

The difference between a safe and a corporation is what I mentioned in the first line of my comment, 'corporations can own things' - safes (as far as I know) can't, so your analogy fails. Unless you dispute that corporations can own things? (if you are going to make that argument, please talk to a commercial lawyer first).

Here's a quote from the Wikipedia entry on property:

"Modern property rights are based on conceptions of ownership and possession as belonging to legal persons, even if the legal person is not a natural person. in most countries, corporations, for example, have legal rights similar to those of citizens. Therefore, the corporation is a juristic person or artificial legal entity, under a concept that some refer to as "corporate personhood"."

This is neither complicated nor controversial - I'm not sure why you are arguing the point.

[Declan]

With respect to the end of my last comment, I'm not trying to be rude, just expressing how I really don't understand what the argument is. Yes, corporations are owned by shareholders so the wealth of the corporation is ultimately the wealth of the shareholder, and yes a corporation is not a flesh and blood human being, but I don't see how either of those facts is relevant to the fact that some corporations own more things than other corporations and are therefore wealthier.

I guess we could make up a new word instead of wealth to describe ownership of valuable goods by entities that are in turn owned by another entity or to describe ownership of valuable goods in a sense not restricted to human beings but that seems a little pedantic to me and contrary to common usage.

[Stephen Gordon]

Tim put it well upthread.

As far as any meaningful discussion of the economics of corporate taxes goes, corporations are assets, not people.

[Bob Smith]

Declan,

I think one reason why you might argue that the concept of "wealth" has no meaning when applied to a corporation is that, while a corporation may have significant assets, it also inherently has an offsetting (implied, but no less real for all that) liability equal to the sum of its net assets, namely to distribute its assets to its shareholders on dissolution. Since wealth, but definition is the amount of your assets minus your liabilities, it makes no sense in this context.

[Mickey]

"If I'm doing the go-forward economics on an assembly plant investment using risk adjusted NPV, I should be indifferent to whether I am subsidized by a government cash infusion, or deferred taxes."

You are correct, you should be indifferent. The problem is human behaviour tends to be rather different. For example, how has the direct subsidy of car plants regime worked in Ontario? Not great, most would agree. Or the steel industry in Atlantic Canada? Also, not great. Compared to the wealth generated by the Alberta oil patch? A bit better, I would argue.

Or, if a government has decided that it wants to "help" business in its jurisdiction, they have two basic choices. Write a cheque, thereby increasing its expense. Or cut taxes, thereby decreasing its revenue. Assuming it can do so in equal measure, why in God's name would they choose the former? (ignoring the perceived political benefits of handing over a cheque).

[Bob Smith]

"So are you implying that corporations could charge higher prices and pay lower wages, but are choosing to forego potential profits? It seems to me that you have to answer yes to that question if you mean to imply that a corporate tax would be 100% passed on to workers and consumers."

That doesn't follow. At a give tax rate, the ability of a corporation to charge higher prices or pay lower wagesis contrained by both domestic and international competition.

The questions is, what happens when you change the tax rate. As Stephen noted above, if you face international competition( with competitors whose tax rates we'll assume have not changed) then you can't charge higher prices to offset your increased taxes. If, on the other hand, you don't face international competition, then you may be able to charge higher prices because all your domestic competitors are facing the same upward cost pressure as you are.

With respect to labour, because it is generally immobile, in response to an increase in taxes which effect all other domestic employers, you can (ultimately) drive down wages. Why? Because, workers (generally) can't/won't move to other countries and all your domestic comepititors for domestic labour are facing the same increases in taxes as you are. This is why we would expect to see (and apparerently do see) labour bear the brunt of increased corporate taxes).

Because capital is mobile, corporations in a small open economy like Canada can't pass on the cost of increased taxes to owners of capital, because they can shift their capital to other countries with lower taxes in order to earn the same-after tax return on investment.

[Phillip Huggan]

"Because capital is mobile, corporations in a small open economy like Canada can't pass on the cost of increased taxes to owners of capital, because they can shift their capital to other countries with lower taxes in order to earn the same-after tax return on investment."

True for other countries whose corporations aren't banking services and big oil. 70% of our profits are earning by either banks/insurance or oil. I wish all of Flaherty's tax cuts would've gone to these other corporations and shift an NDP-ish rise to all other corporations.
With our banks it is like Picasso during the Holocaust: he told everyone he wasn't that good, it was just everyone else was evil and he seemed good. Our banks lent to everywhere but IR postal codes and Harper's $1T insurance furthered this "market failure" (why not sliver them some of the recession insurance and track loan quality?). A bank CEO killed a $180M/yr free bank account plan by citing GOP's cold war era turned to greed, market forces (cdn banks are a cartel, BTW) mantra. Anyways, I doubt rich people are in a hurry to invest in other banks, at least those in nations with Japan demographics or with USA insurance fat.
And the natural resources aren't mobile...
CPC tax policy is nothing but subsidizing oil sands (will be cut to pieces first AGW drought) and banks. We could've taxed oil and banks and beat China and USA to Green Jobs. Instead the media reports how $1B in CPC spending is equivalent to $8B in Dion Green Shift year two. Evil Canadian establishment promoting a Holocaust for nothing more than WASP bling.

[Phillip Huggan]

"An economics question. How does one know definitively that one is at the optimal tax level for corporations, or above it rather than below it?"

The simplest answer is to note when subsequent quality-of-living indicators diminish/plateau or drop with given tax hikes. Though with other countries corporation may themsleves be the reason for a quality-of-living rise. I'd just look at the Gini of the most successful countries, Scandinavia, and trend to there. I'm sure a rich person could think of something really stupid to strive for instead of quality-of-living. Open questions reality asks are how can Scandinavia improve, and what allowance to make for quality-of-living; some longevity decreasing activities are worth it for consenting non-psychotropically addicted adults. Fast-food is fast and some dead end worker really like a smoke break even assuming lung cancer. As it is our corporations excepting oil/banks have a very different makeup from 70% of all profits oil/banks. Viterra is trying to feed the world while Encana is trying to starve it; makes about as much sense to lump them together as it does to classify oil and gas together or Kraft and Philip Morris. What is the Scandinavia Mix, 50% public, 50% private? Damn Reagan may have killed us all.

[Andrew F]

Is it just me or is Phillip hard to follow?

[Just visiting from macleans]

Hey Stephen. Just saw AC on CBC's Lang and O'Leary Exchange talking about a "can opener" and a "Micawber" budget.

I knew what he was talking about because of reading your blogs.

[Declan]

"As far as any meaningful discussion of the economics of corporate taxes goes, corporations are assets, not people"

But then why does the tax system treat them so differently?

If bonds were taxed like corporations, the bond would have to pay a, say, 20% bond tax on any interest generated. Then, the bond's board of directors would hold a meeting to decide how much of the interest should be distributed to the bondholders and how much should be kept for the bond.

Alternatively, you could tax corporations like bonds, and mandate that 100% of all corporate income be distributed immediately as dividends, where it would be taxed equivalent to interest income. If that was how corporate taxation worked (and it might not be a bad idea, in my opinion) then you'd have a stronger case.

"I think one reason why you might argue that the concept of "wealth" has no meaning when applied to a corporation is that, while a corporation may have significant assets, it also inherently has an offsetting (implied, but no less real for all that) liability equal to the sum of its net assets, namely to distribute its assets to its shareholders on dissolution."

That's the best argument I've seen so far, Bob, but it still doesn't really work. There's good reasons why the corporate balance sheet has a specific list of liabilities and retained earnings and equity aren't on that list. The argument that corporations eventually die and therefore have no wealth starts to resemble the 'just visiting' comment above that you could argue people have no wealth since we eventually die.

The legal system recognizes the corporation as a distinct entity capable of owning wealth, the accounting system recognizes the corporation as a distinct entity capable of owning wealth, the tax system recognizes the corporation as a distinct entity capable of owning wealth, everyday usage of the English language with respect to corporations recognizes the corporation as a distinct entity capable of owning wealth. I'm not sure how much clearer it could be.

[Just visiting from macleans]

Go to 5:20 re earlier citation

http://www.cbc.ca/video/#/News/TV_Shows/Lang_&_O%27Leary_Exchange/ID=1443752571

[Stephen Gordon]

The legal system recognizes the corporation as a distinct entity capable of owning wealth, the accounting system recognizes the corporation as a distinct entity capable of owning wealth, the tax system recognizes the corporation as a distinct entity capable of owning wealth, everyday usage of the English language with respect to corporations recognizes the corporation as a distinct entity capable of owning wealth. I'm not sure how much clearer it could be.

It's clear, but it's irrelevant. That 'wealth' shows up in the national balance sheets as an asset for the households who own the company. Otherwise, assets held by the corporation would be double-counted: once as an asset for the corporation, and again as an asset for the households that own the corporations.

Saying that a corporation owns an asset is the same thing as saying that the corporation's owners jointly own that asset. The legal stuff is simply a way to make it possible to buy and sell things and to enter into contracts without having to make sure that every owner approves of the decision. It keeps the lawyers busy, but it simply doesn't matter when it comes to welfare analysis.

[Bob Smith]

Decan,

Just to clarify, you don't own wealth, you own assets. Wealth is the difference between the value of your assets and the value of your liabilities. That corporations can own assets and assume liabilities isn't the same as saying that they can be "wealthy".

Moreover, the argument that corporations have a liability to distribute their assets to their shareholders goes beyond their legal liability to distribute their assets on dissolution (although, I didn't say that earlier). After all, their shareholders can (collectively, at least) cause them to distribute some or all of their assets without dissolving the company (by having the company pay dividends or returns of capital). To use your analogy with a real person, would you say that someone who is liable to have to distribute all of their (net) assets to another group of persons, at the discretion of that other group of persons, is wealthy? If you had an asset worth $1,000,000, but an obligation to pay me $1,000,000 if and when I tell you to do so, I doubt you'd consider yourself to be wealthy in any meaningful sense of the term.

And, while you're right, that Shareholders' equity isn't listed as a liability of the company on corporate balance sheets, the fact that it's described as shareholders' equity (and not the equity of the corporation) is telling isn't it? The difference between the value of the assets of a corporation and the value of its debts of the corporation is recognized (by accountants, at least) as being the equity (or wealth) of the shareholders, not of the corporation. For once, the accountants are right.

[Toby Whitfield]

Re the corporations as people debate, there are significant differences already mentioned between legal and natural persons. It is not, though, limited to, or as simple Stephen Gordon says here:

"The legal stuff is simply a way to make it possible to buy and sell things and to enter into contracts without having to make sure that every owner approves of the decision. It keeps the lawyers busy, but it simply doesn't matter when it comes to welfare analysis."

In fact, it is the limited liability of the corporation that makes a huge difference. A corporation may be viewed as a flow through entity when it comes to the corporation holding wealth or having a stream of payments (ignoring the use of small corporations as a way of building tax deferred funds for wealthy individuals). However, when a corporation has debts or other obligations, the individuals are not on the hook. In that way, it is fundamentally different from a partnership or other forms of business organization.

This is essentially a way of promoting the taking on of risk, the argument being that the socially optimal level of risk for any given business is higher than that of an individual, because society is more diversified. Of course, this doesn't help the sucker who gets stuck as a creditor for the failing corporation ;)

[Jean Cooper]

I wonder if someone could clear up a question I have. I was looking at TD bank's 1st Quarter 2010 financial statement a few weeks ago and noticed the following:
(http://www.sedar.com/DisplayCompanyDocuments.do?lang=EN&issuerNo=00001369, March 4 Interim financials

Total Revenue: $5,037 (Million)
Total Expenses: $3,498 (Million
Income: $1,539 (Million)

Then they say their taxes on the above is $270 million, for an effective tax rate of 17.5%.

Well, 270/1539 is 17.5%, that true. But how come they are only paying tax on their net profit? If you look at tax on their total income, 270/5037, their tax rate is 5.36%.

Is that how corporate taxes are calculated? On their profit as opposed to their total revenue?

I have to pay income taxes on my gross income, I am not allowed to deduct all my expenses, then pay tax on what is left. How come corporations can do that?

[Andrew F]

They probably mention their average tax rate somewhere in the report. The company I work for has an average rate in the 30s%.

[westslope]

This thread has me wondering why the popular voice likes to demonize organizations in lieu of demonizing people.

Most theories of the firm would predict that corporations are more productive and hence more 'powerful' than the sum of their parts. Thus capable of doing greater wrongs? Or is it impolite to attack people but acceptable to attack large corporations, unions, government, and NGOs?

Some of the anti-corporate bashing (witness the film Avatar) is highly misleading to say the least. Companies do not ethnic cleanse; governments do.

[RSJ]

Westslope,

Your comment has me wondering why people demonize "Government" in lieu of the demonizing people :P

I think with any organization, the anthropomorphizing is due to the fact that it is justified. There is such a thing as a "corporate culture", "institutional memory" and group behavior that would not be the case had each individual acted on their own. Many people are disturbed by this.

That is true for Coca-Cola just as much as it is for the city of New York or the government of Sweden. Although it is true that businesses do not engage in ethnic cleansing, but at the same time we do not invade or bomb businesses either -- we just tax them, or in some cases, sue them in a limited liability manner. So the lower level of power vis-a-vis taking lives is matched by the lower degree of accountability vis-a-vis shareholders losing their lives, as should be the case.

But each organization has its own reality distortion field, and each is able to achieve more than the sum of the parts.

[Patrick]

westlope: Good point. I would argue that the evidence of recent history is that small groups of powerful people (a.k.a 'management') can and do perpetrate enormous harm by misusing the assets of corporations - assets that do not belong to them!

[Just visiting from macleans]

Companies do not ethnic cleanse; governments do.

...government of the people, by the people, and for the people

[Andrew]

Jean Cooper wrote: "I have to pay income taxes on my gross income, I am not allowed to deduct all my expenses, then pay tax on what is left. How come corporations can do that?"

Income tax is, more or less, based on your capacity to consume goods or services - thus no deductions for people because what you would be deducting (the amount you spent on food, shelter, clothing and anything else) would be the very things used to measure you income. For a business, it makes no sense to tax revenue when some of that is going right out the door. It is *profits* that reflect *their* capacity to consume.

Besides think about it this way, you have two firms:

Firm A:
Revenue - $1,000,000
Expenses - $900,000
Profits - $100,000

Firm B:
Revenue - $800,000
Expenses - $400,000
Profits - $400,000

Would it really make sense to tax Firm A more than B just because its revenues were greater, though its profits were less?

[Frances Woolley]

Declan's point (many comments above) is a critical one - no corporate taxes would be like corporations having unlimited RRSP contribution room.

To the extent that Steve is right in his original point that all corporate income eventually goes to someone - say the shareholders - as soon as income is distributed to shareholders it triggers a tax liability. Just like you pay taxes when you take money out of an RRSP.

If there's no corporate income tax, then there's a huge incentive to postpone tax payment by accumulating assets within the corporation. Why is this a problem? There might be other investment opportunities elsewhere that generate higher rates of return.

That's why Canada's corporate income tax is designed as a "withholding tax" - basically the corporate income tax paid is largely refunded to shareholders through the dividend tax credit at income tax time.

For foreign-owned corporations, there's no refund through the income tax system - but you know what, I don't really object to foreign owners paying some Canadian taxes.

The little-old-lady-with-blue-chip-shares beloved of people who tell hypothetical tax tales actually benefits from the corporate income tax in that she will receive a full dividend tax credit for corporate income taxes paid but will not, in fact, pay much by way of personal income taxes on her investment income. So it's progressive for that particular slice of the share owning public.

B.t.w., what did people think of Margaret Wente's column yesterday?

[Andrew F]

To be clear, I don't think anyone is saying we should eliminate the corporate income tax. We're reducing it to 25% in some provinces.

[Bob Smith]

Jean,

Anyone engaged in a business (be they an individual or a corporation) is allowed to deduct certain business expenses (as allowed under the Income Tax Act (Canada) (the "Tax Act")) in computing their taxable income. Your income (for tax purposes, at least) is your revenue minus your deductible expenses. Employees generally don't have deductible expenses (which is why you and I pay tax on pretty much everything we bring in).

AS for why TD Bank's tax rate looks so low, there are a number of possible reasons. First, the computation of income, for tax purposes, is different from the computation of income under Generally Accepted Accounting Principles ("GAAP") which are used for financial statements. So, for example, the Tax Act may disallow or restrict deductions which are allowed under GAAP or may allow deductions greater than those allowed under GAAP (typically you see examples of the latter in the treatment of depreciation). Second, in a taxation year, you're generally allowed to carry forward losses from previous years to reduce your tax obligations (this generally isn't a concern for people who don't carry on business, since employees seldom have losses). The logic is that, if you didn't allow the carry-forward of such losses, you would overtax businesses which have variable income, relative to businesses with steady incomes So, a company may have a widly profitable year, but pay little tax because it is using up losses from previous years.

[Bob Smith]

Frances,

You're right that the corporate tax system works as a form of withholding tax for some taxpayers. But it isn't a proper withholding tax, because only taxable Canadian residents can "get the tax back". Non-residents shareholders pay tax twice (at least by statute, thought the whole point of the discussion is that the economic cost of corporate tax isn't borne by shareholders but by workers), once at the corporate level and once when dividends are distributed (strictly speaking they may also pay tax a third time, when they're taxed in their home country, though they can typically get recognition of the Canadian withholding tax on dividend). Because they aren't entitled to the dividend tax credit, they don't get recognition of the tax paid at the corporate level. Similarly, non-taxable entities (pensions, RRSPs, charities, etc.) which hold corporate shares end up paying tax at the corporate level, but can't claim the dividend tax credit.

Now, if you wanted to make the corporate tax a proper withholding tax, you'd keep the same system, but allow corporations to deduct dividends in computing their income (as we do with trusts).

[Darren]

Min: "Well, south of the border corporations are persons with the right to own property. American corporations can be wealthy, thank you very much. ;)"

No, no, no, no, no!

http://en.wikipedia.org/wiki/Category_mistake

"A category mistake, or category error, is a semantic or ontological error by which a property is ascribed to a thing that could not possibly have that property"

Corporations (in Canada, the US, or on the Moon) are owned by their shareholders. People are not. The wealth "owned" by the corporation is really owned by the shareholders of the corporation.

Stephen has performed an excellent service in pointing this out.

[Darren]

Declan: "This is neither complicated nor controversial - I'm not sure why you are arguing the point."

Declan, he is arguing with you because you are completely and 100% wrong.

[Darren]

Two additional lines of argument.

1) If you are owned, by definition you cannot have wealth.... any wealth that seems to "belong" to you really belongs to your owners. Corporations are owned by people. (OK, maybe owned by another corporation, but that corporation is in turn owned by people).

2) Yes, there are assets that are said in common speech to "belong to corporations". However, on a corporate balance sheet, there is a line called "owners equity" that equals assets - liabilities. Assets - liabilities is the "wealth" of the corporation, but it really belongs to the owners.

[Bob Smith]

Jean, to follow up on my earlier point, that book profit differs from taxable income, I just stumbled accross a recent Statistics Canada publication on the point, which compares aggregate book profits and tax profits for Canadian corporations, and also provides a summary of the effective tax rates on Canadian corporations. It's long, but makes for interesting (for some) reading www.statcan.gc.ca/pub/61-219-x/61-219-x2008000-eng.pdf.

Not surprisingly, it finds that, in 2008, non-financial corporations paid tax equal to just over 27% of their taxable income, while financial corporations (i.e., the big bad banks) paid tax equal to over 33% of their taxable income (the statutory tax rate in Canada, depending on the province that the income was earned in, varies from 28/29% to the mid 30s% so, as you might expect, the actual taxes paid is close to that tax rate - though it'll be far less for 2009 because of large corporate losses). If nothing else, it belies the NDP's usual claim that the big bad banks don't pay any taxes.

[Declan]

"Completely AND 100%"

Wow, that must be like 120%, at least.

"The wealth "owned" by the corporation is really owned by the shareholders of the corporation"

Right, and by the same token, the assets "owned" by a corporation are really owned by the shareholders. So anyone who refers to a corporation's assets is incorrect?

And the profits "earned" by the corporation, are really the shareholders' profits. So it is incorrect to refer to a corporation's profits?

And the people who "work" for a corporation, really work for the shareholders. So anyone who refers to someone as being 'employed by a corporation' is incorrect?

The only argument here is a semantic one as I pointed out above and you mention as well: Is the word 'wealth' applicable to non-human entities, in particular, to corporations? I've pointed out that the accounting, legal and taxation systems, as well as the man on the street, not to mention dictionaries, seem to think it can be applied to corporations. A few people here appear to disagree. I guess people can use a word however they want, Humpty-Dumpty style, but I think communication is more effective when the minority goes along with the majority.

Say one corporation has assets - liabilities = $100MM and a second corporation has assets - liabilites = $200MM. I'd say the second one is wealthier. What term would those who say the word 'wealth' is reserved for people only prefer that I use - must I spell out 'assets - liabilities' every time?

[Min]

Darren: "Min: "Well, south of the border corporations are persons with the right to own property. American corporations can be wealthy, thank you very much. ;)"
No, no, no, no, no!
http://en.wikipedia.org/wiki/Category_mistake
"A category mistake, or category error, is a semantic or ontological error by which a property is ascribed to a thing that could not possibly have that property"

If it is a category mistake, it's not my category mistake, it's the Supreme Court's. ;)

To echo Westlake, in reading this thread I am reminded again of how senseless arguments over definitions are. According to common usage, corporations can be wealthy. That may be anthropomorphism, but there is a difference between a metaphor and a category error.

To be sure, for certain purposes one way wish to use a different, more specialized definition. But simply to criticize the common usage creates a diversion. Suppose that someone says, "I have a weighty decision to make," and a physicist says, "Decisions do not have mass." That may be so, but the physicist made a stupid remark.

Yeah, I know, remarks can't be stupid, people are stupid. ;)

[Declan]

I defer to Min's superior eloquence on this topic... well said.

[Stephen Gordon]

If common usage leads people to make fundamental errors in how they think about important policy issues, then it's reason enough for criticism.

And I'd like very much to know what the 'diversion' was. It seems to me as though the discussion has been diverted away from the main point on the incidence of corporate taxes toward narrow, legalistic (and yet still wrong!) interpretations of what it means to say that a corporation is "wealthy".

[Stephen Gordon]

In fact, I make a counter-accusation: referring to corporations as "wealthy" is an attempt to divert attention away from the people who *really* pay corporate taxes: workers and consumers.

[Just visiting from macleans]

Having introduced the legal definition of a corporation as a person, allow me to respond. This was the central theme of a Canadian produced documentary coincidently called The Corporation.
http://www.thecorporation.com/index.cfm?page_id=2

Now, it does contain the usual lefty suspects, and others (Noam Chomsky, Naomi Klein, Milton Friedman, Howard Zinn, Vandana Shiva and Michael Moore) but its central argument was that if a Corporation is a legal person, what type? It argued a sociopath.

Now, I may be mistaken, but I believe this program has entered the core study of some HBA/MBA programs dealing with business ethics.

So, if the central premise is that a corporation = shareholders, I'd argue that is a bit simplistic. There are many devout church going individuals who are ruthless businessmen. Capital is deployed differently by corporations and its many times removed owners.

Also, if the central premise is that tax increases (and by extension tax decreases) are nearly or fully absorbed by the employees or customers, I'd also argue that is too simplistic. It depends. Perhaps in a highly competitive, marginal and mobile industry that competes on cost. In a resource based economy during a commodity boom? Less so.

Take the resource industries- oil in particular. If this theory held true, shouldn't one expect salaries /compensation to be also closely tied to commodity prices or royalty rates (a form of taxation)? Profit doubles therefore salaries double? I bet if I looked at an O&G company over the past 10 yrs I'd see the stock price rising faster than salary levels.

[Stephen Gordon]

The Corporation is an excellent example of a project that subtracted from the sum of human knowledge. The premise itself was stupid; nothing intelligent could come of it.

But it did serve as a handy crutch for people who wanted to appear to be intelligent and who were too lazy to do some actual thinking.

And it also succeeded in diverting attention away from things that really matter.

[Just visiting from macleans]

Well, you'll have to take that up with your latest addition to the blogging roll. Apparently his alma mater offers two years of study at a graduate level, hundreds of business case studies, and produces individuals "who wanted to appear to be intelligent and who were too lazy to do some actual thinking."

But that would be an academic debate.

[Declan]

Actually, I think the premise of 'The Corporation' is highly relevant to current issues, for example, the recent decision in the U.S. regarding corporations exercising political 'speech' or the task force in B.C. currently studying whether corporations should be allowed to vote in municipal elections.

To the extent that our socity treats corporations as people, it's worthwhile, and important in my opinion, to examine what sort of people they are.

Although, if people are interested in the topic, I'd recommend David Korten's book 'When Corporations Rule the World' (not nearly as shrill as the title would suggest and almost eerily prophetic with regard to the current economic crisis despite being written in the early 90's) over the documentary, 'The Corporation'.

[Stephen Gordon]

What's the point of treating corporation like people when they're not people?

Maybe we should we just call them Lorettas?

Anthropomorphising corporations is a mistake, and a distraction from what really matters.

[Just visiting from macleans]

And call shareholders HAL

http://www.youtube.com/watch?v=ukeHdiszZmE

[Declan]

"Anthropomorphising corporations is a mistake"

As my mom always says, 'Tell it to the judge...' :)

[Nick Rowe]

A slightly different way of looking at it: tax systems should prime facie be neutral with respect to the type of economic organisation. People should pay the same total tax regardless of whether they coordinate their activities via corporations, sole proprietorships, workers' cooperatives, consumer cooperatives, or whatever.

(And, I keep coming back to what I learned from Joseph Heath: corporations are just lenders' cooperatives, as opposed to workers' or consumers' cooperatives.)

Frances' point about tax deferral/RSPs is a good one. But corporate profit tax seems to be not the best way of handling it.

[Yvan St-Pierre]

I wouldn't want either to add to the semantic debate on the deep meaning of being wealthy, but hey, why not after all - the question I'd just ask is: can a corporation ever suffer, in the sense that someone losing a limb can suffer? If so, we just don't live in the same world. If not, then it can't benefit from anything either, in the sense that you and I psychological selves can benefit of our "ownership" of "assets" or "wealth" (words that have variable meaning, hence the poetry or the waste of time, depending on the perspective).

To me, the real interesting question is why the persistence of corporate tax schemes. I can see the political motivation (seems pretty seductive indeed, as much of this stream of comments shows), but why does it persist, in an evolutionary sense? If the median voter, who is generally more likely to be a worker-consumer than to own "wealthy corporations", can't reasonably see something worthwhile there, what's blurring his vision? You would think that where such tax is lowered, people would see the benefit and want it lowered even further, no? To the point where it would vanish altogether?

I'm just wondering if the following is a useful hypothesis: corporate tax, at some optimal level, could actually be a useful hurdle for weeding out bad investments. I'm not saying owners can't transfer the tax burden over their profits to other stakeholders, but that some of the profit-making that would have been attempted without the tax will not materialize when it is too hard to make these transfers, and these investments are precisely those that were going to be less profitable in the first place. In that sense, this would be working as a sort of natural stabilizer - less bad risks taken through the upturn of the business cycle? Now, I'm no macro, finance or fiscal guy, but am I just stating the obvious or am I really missing something?

[Mike Moffatt]

"Well, you'll have to take that up with your latest addition to the blogging roll. Apparently his alma mater offers two years of study at a graduate level, hundreds of business case studies, and produces individuals "who wanted to appear to be intelligent and who were too lazy to do some actual thinking."

My alma mater is the University of Rochester - I work at Ivey. And the MBA program is a 12-month one now.

I'll refrain on commenting on the rest.

[Darren]

Declan: "Wow, that must be like 120%, at least. "

In your case, that's accurate.

"Wealth" is not a concept in corporate accounting. On a corporate balance sheet, assets - liabilities = "net worth". That's the correct and commonly used term, there is no need to whinge about the lack of a way to refer to that quantity if you aren't allowed to (incorrectly) call it "wealth". A synonym for net worth is shareholders equity (this is all just accounting 101 by the way). Net worth and "corporate wealth" are NOT synonyms. If they were, then corporate wealth and shareholders equity would also be synonyms. Imagine a corporate with 200 million in "wealth". Then the shareholders equity is also 200 million. What is the contribution to net worth of the country of this corporation? 200 from the corp, 200 from the shareholder, 400 million. That's double counting, and ridiculous. Therefore it is absurd to refer to corporate net worth as "wealth".

Steven wrote that corporations can't have wealth because corporations "aren't people". That's not quite accurate, and invited a lot of confusion about "legal persons" and "natural persons", which was duly displayed here. The ontological POINT is that corporations are OWNED, and people are NOT. Any entity that is OWNED cannot have wealth. That's just common sense.. I don't know how to make it any clearer than that. That's WHY, on the first page of every public finance textbook, it tells you that only people can pay taxes. All other economic entities are owned by people, and therefore in the final analysis cannot pay anything.

Min compares this to arguing about the phrase "a weighty decision", but Min is wrong. Speaking of "wealthy corporations" leads directly to conceptual errors in policy making.

[Darren]

I'm going to expand on my last post because I know full well it will be misunderstood.

On a PERSONAL balance sheet, "net worth" and "wealth" are freely and correctly used as synonyms. On a CORPORATE balance sheet, they are not and cannot be synonyms.

Why not? Because on a CORPORATE balance sheet, net worth and shareholders equity are synonyms, and so if corporate wealth = corporate net worth, then corporate wealth = shareholders equity, leading to the double counting problem I described above.

On the other hand, there is NO SUCH THING as 'shareholder's equity' on a personal balance sheet since people aren't owned (in other words, a personal balance sheet, unlike a corporate balance sheet, need not balance), and so no problem in referring to net worth as "wealth".

As Steven and I have pointed out, this is not merely pedantic whinging, this is a real and important conceptual point that must be understood if you do not wish to make policy errors.

[Nick Rowe]

Darren: yep. It's the "category mistake" as you said in your earlier comment. (Off-topic: I learned about category mistakes (Gilbert Ryle?) in undergrad philosophy; where did you pick up the idea?)

But, I think nevertheless it is *logically* possible to imagine a world in which taxing corporations would not tax people. Though it's a very weird world, where corporate profits are fully dissipated by some sort of prisoners' dilemma rent-seeking. Not sure why corporations would even exist in such a world.

Planning to do a post on this soon.

[Nick Rowe]

To paraphrase Ryle: "OK, I've seen the workers, the managers, the customers, the bondholders, the suppliers, and the shareholders, but where's the corporation?" says the visitor from another planet.

[Darren]

"Any entity that is OWNED cannot have wealth. "

I'll expand on this too, because it will be likewise misunderstood by those who are determined not to understand.

The assets of a corporation do not belong to the shareholders, they belong to the corporation.

Therefore: A corporation can have assets, it can have liabilities, it can have employees.

But it cannot have wealth.

Why not? When you buy a share of a corporation, you are not just buying its assets, you are buying its liabilities too. In other words you are buying the wealth of the corporation.

The assets and liabilities belong to the corporation, but the WEALTH belongs to the shareholder.

[Just visiting from macleans]

When you buy a share of a corporation, you are not just buying its assets, you are buying its liabilities too. In other words you are buying the wealth of the corporation.

You are in fact purchasing not only its assets and liabilities, but its future earning capacity using those assets. And to maximize those future profits requires having the proper management, strategy, marketing, reputation or brand name(goodwill), financial structure etc. etc.

A corporation is more than simply the sum of its parts. If an asset is not productive, or is of more value to another corporation, it will be disposed of or acquired. In other words, there are synergies.

Personally, I don't have much problem accepting that corporations are ultimately owned by individuals. Where I differ is accepting that taxing corporations ultimately falls on its customers or its employees (not its owners); or that taxing corporations can have exactly the same outcome as taxing individuals. But, I'm sure that there are advocates of no corporate tax at all, no personal, only consumption taxes who have studied this idea and are far more knowledgeable about it than I. That's not to say I won't still poke away at the assumptions.

[Andrew F]

"Where I differ is accepting that taxing corporations ultimately falls on its customers or its employees (not its owners); or that taxing corporations can have exactly the same outcome as taxing individuals."

In the short run, (unexpected) taxes may be borne by investors. In the long run, in a small open economy, none of the expected tax burden is borne by investors. Capital flows to where it can earn the world after-tax rate of return. If you raise taxes, there will be fewer total investment opportunities that reach this bar, and thus less investment. That lower investment will result in lower wages or higher prices for consumers.

So yes, in the short run you can surprise investors and stick them with tax increases. In the long run, tax rates are taken into account when making investment decisions.

[Stephen Gordon]

And the long-run effects are what matter most for tax policy.

[Just visiting from macleans]

So yes, in the short run you can surprise investors and stick them with tax increases. In the long run, tax rates are taken into account when making investment decisions.

And it is in the short term where the uncertainty is the least, and where the impact of who bears the cost is greatest when undertaking go forward NPV economics.

Capital flows to where it can earn the world after-tax rate of return.

This is the marginal investment for a corporation that is at or near its own corporate hurdle rate. Not the same hurdle rate for all companies. And not all investments are made at the margin. Hence why I asked much earlier: "How does one know definitively that one is at the optimal tax level for corporations, or above it rather than below it?"

There must be an optimal point (at a given time) where the further cutting of taxes does not increase overall tax revenue. Or are you suggesting no corporate taxes (just one of many cost inputs I might add)?

[Andrew F]

The goal of reducing corporate taxes is not revenue maximization. The goal is to optimize social welfare by improving competitiveness.

It's not clear to me that we need to tax corporate profits. Profits aren't a bad thing. We can tax these anyway once they are distributed to shareholders. Currently there are generous tax credits to Canadian shareholders of eligible corporations. If there were no corporate income tax, then such credits would not be necessary and dividends could be taxed at the full marginal rate. Please note that we could continue to institute a withholding tax on dividends to foreign shareholders. We have treaties with several countries where the shareholder essentially pays the maximum tax rate between the two jurisdictions, but is not double taxed.

On the other hand, I am all for putting Pigou taxes in place to internalize the cost of externalities, esp. pollution and resource consumption. I don't see what's wrong with taxing the shareholders and workers and consumers directly, rather than the corporation. You at least have some more finegrained control over who bears the burden of taxation.

[Just visiting from macleans]

The goal of reducing corporate taxes is not revenue maximization. The goal is to optimize social welfare by improving competitiveness.

That was sort of implicit - going by Moffat's first post on the purpose of taxation, item 1.

Improving competitiveness. Hmmm. It doesn't seem to me that Canadian corporations have such a great track record in improving competitiveness when they were cushioned by a low dollar. In fact, some may argue that they were insulated by it. Can non competitive corporations also become addicted, so to speak, with the continuing lowering of tax rates, looking to improve returns through the tax system as opposed to becoming innovative and more productive internally?

[Andrew F]

I don't believe that has been the experience elsewhere.

I expect that the softness of Canadian companies during the period of low exchange rates is probably due to poor access to the Canadian market. The low dollar also tended to discourage investment since capital goods tend to be imported, and thus their price had risen relative to local labour and other inputs.

[Darren]

Just visiting: "Personally, I don't have much problem accepting that corporations are ultimately owned by individuals. Where I differ is accepting that taxing corporations ultimately falls on its customers or its employees (not its owners);"

Certainly. These are two seperate questions, the first is ontological, the second is a matter of empirical economics that people can legitimately argue about. (I believe that the weight of evidence that currently exists suggests that most corporate taxation is borne by employees and customers rather than shareholders).

It is just wrong to speak of "wealthy corporations", because it allows for loaded rhetoric about "taxing wealthy corporations" (hey, that MUST be a progressive tax somehow, right? no analysis required)

[Just visiting from macleans]

(I believe that the weight of evidence that currently exists suggests that most corporate taxation is borne by employees and customers rather than shareholders).

How about in a commodity where Canada's producers are world price takers rather than world price makers? Care to explore the historical financial results with me? Oil seems like a likely candidate.

[Andrew F]

I think that's a matter of rent seeking. Like I said, we should tax things like the consumption of resources, in this case, oil deposits (they belong to the crown and corporations pay a royalty to extract and sell them). The same would apply to reserves of other minerals, water, soil, forests, etc.

[Just visiting from macleans]

But what if the rents (royalty rates) go up or down? Who pays/benefits?

[Andrew F]

You're confusing yourself. Rents are different than corporate profits. There is no reason to let corporations extract rents from natural resources, etc.

[Just visiting from macleans]

OK, let me be more explicit. Alberta recently changed its royalty rate for natural gas and conventional oil. That means for the same investment, an oil and gas company will now realize higher tiotal revenue, for existing and future plays. Who will realize the resulting higher profits? Employees, customers, or shareholders?

[Andrew F]

Well, some combination of the three. Shareholders will definitely get some of that, particularly for the investments that have already been made.

[Just visiting from macleans]

I'd say shareholders by far the most. Customer's won't. The price they will pay is the world price for oil - at 2.5 million barrels/d out of 86, Canadian producers are price takers.

Suncor's stock price from Jan '00 to Jan '10 has gone up by a factor of 6. Salaries/compensation for sure has gone up over the same period, but no where near 6 times (and even if they did, they represent only a portion of total costs - the remainder flows through to the bottom line).

[Andrew F]

This is an argument for royalties, not a profit tax.

[Just visiting from macleans]

As far as the corporate bottom line is concerned, same thing. Just applied differently.

[Declan]

Darren, repeating the same point ten times won't help, since I understood it the first time that Bob made it (although the insults and capital letters are at least amusing). If I thought repeating my point of view ten times would help you understand mine, I would, but that doesn't seem likely.

I'm well aware that you can't add up the wealth of a corporation and the wealth of its owners. But I don't see why you can't recognize the same wealth as being held in two different forms by two different entities, regardless of whether one entity is owned by another. As I'm likely getting close to repeating ten times by now, it is simply a semantic issue - you were probably closest to getting this in your first comment, but you seem to have wandered away.

Nick (12:55) - sounds like Ryle lacks a little imagination, I recommend reading "Godel, Escher, Bach", and the discussion of how in the ant kingdom, the intelligence resides not in the individual ants but in the anthills. Agency is not limited to the bags of mostly water and a corporation is more than just a safe for the shareholders.

[Stephen Gordon]

But I don't see why you can't recognize the same wealth as being held in two different forms by two different entities, regardless of whether one entity is owned by another.

For the same reason we don't recognise the property owned by office buildings.

What purpose is being served by making this distinction? In the current context, it just obscures the issue of who pays corporate taxes.

[Declan]

"For the same reason we don't recognise the property owned by office buildings."

You missed the part of my comment where I noted that a corporation is more than just a safe for the shareholders. Nobody ever suggested having separate tax rules for office buildings. Nobody ever suggested that office buildings should have their own financial statements, with a section for equity, nobody ever suggested that office buildings were legal people, or should be able to enter into contracts, to own property, to make campaign contributions, to have free speech rights or to vote. Say it as many times as you like, but a corporation is not merely an inanimate object.

The issue of which flesh and blood people pay corporate taxes is (in my mind) clearly separate, since the corporation is obviously not a flesh and blood person. I guess some pundits or politicians might get confused and think that somehow taxes paid by a corporation are not paid by flesh and blood people at all, but that seems like such an elementary error it never really occurred to me that we might be taking it seriously as a risk in formulating public policy.

[Stephen Gordon]

I'm afraid it is. How many voters are seduced by that line? "Tax the wealthy corporations? Great idea! *I'm* not a wealthy corporation, so it's no skin off my nose!"

[Bob Smith]

I don't see why the analysis as to who bears the cost of increased (or benefits of decreased royalties) would be different for royalties then it would be for corporate tax on any other company who sells goods on the world market. In the long-run, it's probably be workers. Capital is mobile, so its return will equalize accross countries. They won't bear the hit in the long run. Similarly, consumers aren't going to bear the hit, they can always buy oil from elsewhere. At the end of the day, it'll be workers.

And, I'd suggest that we saw this in reverse, when the price of oil was skyrocketing (which is akin a decrease in royalty rates), wages in Alberta skyrocketed (as we saw in newstories about Tim Horton's being unable to find workers at wages that were double minimum wage).

Where there is a difference, I suppose, is that there is probably more labour mobility between Canadian provinces than between countries (both because Canadians have a constitutional entitlement to mobility, but also because, with the exception of Quebec, there is a more or less common culture, language, etc. which makes mobiilty easier). In the long run, I suppose that labour is relatively mobile within Canada (which explains why the Oil patch is largely populated with people from the Atlantic provinces), so the ability of labour to capture all of the increased profit from an increase in oil prices is constrained. But then again, the demand for labour in Alberta may be sufficiently large, that vis-a-vis the Canadian economy as a whole, that it might be able to influence wages in the rest of Canada (which won't be the case for people seeking to sell oil on the world market or to obtain capital on the world market). I don't know of any statistics to this effect off-hand (and I can't be bothered to look for them), but I wouldn't be surprised to see the oil boom of the 2000's have wage effects outside of Alberta (and Newfoundland), as employers in those provinces had to compete with employers in Alberta (anecdotally, I know the Toronto construction industry in the mid-2000's was having a hell of time attracting and keeping skilled workers, for what that's worth).

[Just visiting from macleans]

If workers ultimately capture changes in corporate tax rates or royalties, why does the stock market respond instantly one way or the other after a significant announcement of such changes?

[Andrew F]

Stocks prices represent the present value of dividends going off into the future, heavily discounted. A reduction is corporate taxes will be captured by investors in the short run, but by workers and consumers in the long run as new capital flows in and increases competition for customers and workers.

[Bob Smith]

The flippant response might be: why did people buy tech stocks with PE multiples in the 100s? Why did people buy asset back paper secured by subprime mortgages (it's got a triple A rating, so it must be as safe as treasury bonds, and it pays three times the return!)? Because investors, even sophisticated investors, are prone to believing some pretty stupid things.

The more serious response would be that workers ULTIMATELY capture/bear changes in tax rates, that doesn't mean they will bear it immediately after a change in tax rates. To the extent that it takes time for wages to adjust, CHANGES in tax rates do have an impact on shareholders (but a far more modest impact than one might expect if shareholders bore the entire cost of corporate taxes forever). I don't think anyone who says that ultimately shareholders don't bear the cost of corporate taxes would disagree with that statement. But, in the long run (and in an situation where taxes are steady over long-periods of time - since I'll assume that randomly changing taxes isn't good tax policy), wages will adjust to reflect the new tax regime, and assuming that markets in goods and capital area open, workers will continue to bear the costs of the corporate tax system.

[Andrew F]

And on royalties: the capital may be mobile, but the resource sure isn't.

[Just visiting from macleans]

So, let me see if I understand the basic premise of the economist's theory of who bears costs/benefits.

In an ideal and perfectly efficient world (equal access, and equal knowledge), any return that any corporation makes will ULTIMATELY be reduced down to the going world return on investment.

Say a corporation is an outlier and makes 50% ROI, this will eventually be eroded down to say 15% ROI through increasing labour demands (costs) and downward pressure on prices by customers, or by new entrants wanting to make the same return.

Is that the basic theory?

And if so, does it in theory apply universally to all industries/all corporations?

[Darren]

Declan: "But I don't see why you can't recognize the same wealth as being held in two different forms by two different entities, regardless of whether one entity is owned by another."

How can that sentence even make sense? To me (and to the man on the street) "holding wealth", if it means anything at all, means that nobody else can simultaneously "hold" it. If you have a concept of "holding wealth" in mind that lets your sentence makes sense (and has any applicability at all to the shareholder/corporation relationship), I'd be genuinely curious to hear it.

I'm a big fan of using the language in a way that makes sense, although I acknowledge that not everyone shares my enthusiasm in this matter. To me (and to the man on the street), you can't make two millionaires out of the same million dollars, so I'm not sure which one of us is guilty of redefining words here.

Declan: "You missed the part of my comment where I noted that a corporation is more than just a safe for the shareholders. Nobody ever suggested having separate tax rules for office buildings, etc, etc"

This list of the differences between safes and corporations is long and rhetorically impressive, but it fails to answer the two questions of interest.

1. Why is it that it is meaningless to speak of safes as being "wealthy", but not meaningless to speak of corporations as "wealthy"? Out of the many differences between safes and corporations, which is the important and fundamental difference that lets you sensibly speak of "wealthy corporations" but not "wealthy safes"?

2. Assuming that it makes some kind of sense to use the word "wealthy" to apply to corporations (a proposition which is by no means established), why would you want to?

There is no need for it.... there is already the term "net worth" for corporate assets - liabilities.

If you speak of a "wealthy person", you've told me something useful about that person that I didn't know before. (I know how likely they are to be working, I can infer some possible life stories, I know whether I should be nice to them or not :)

But if you speak of a "wealthy corporation", you've told me..... what exactly? What's the difference between a "wealthy" corporation and a "not wealthy" corporation, and is somebody without a CFA capable of understanding that difference?

Speaking of "wealthy corporations" serves no positive informational purpose I can see, but does serve some negative ones.

1. It arouses class resentments..... the man on the street would love to stick it to a "wealthy corporation". The very phrase suggests heartlessness and cruelty. It's not for nothing that the NDP uses this rhetoric all the time.

2. It very, very strongly suggests that corporate taxes are progressive. Go out on the street and take a poll.... would it be more progressive to tax all the corporations or just the "wealthy" ones. The correct answer is "who knows", but 99% of respondents will be led to a false certainty by that empty and meaningless phrase: "wealthy corporations".

"How often misused words generate misleading thoughts." -Herbert Spencer