"I'm a corporation and so's my wife."

"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.

Corporations can own property and sign contracts. True, corporations cannot vote (yet), but in the US the idea of corporate personhood has been used to extend other constitutional privileges to corporations - most recently corporations' first amendment freedom of speech rights. 

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."

Comments

[Determinant]

Bravo, Frances!

I am of the opinion that corporations are not persons, they are legal fictions. They should be treated as legal fictions: useful in some cases, but not to be given free reign over the whole legal spectrum.

When judges get too corporate-rights friendly, my refrain is: can't you tell the difference between a real person and a legal fiction?

[Gregory Sokoloff]

Frances, excellent post. One more advantage for incorporated small businesses: the private health services plan. A business can fully expense qualified health benefits to employees, and these benefits are not taxable to the employee. There is a similar deduction for individuals who pay for such expenses out of their own pocket, but I believe it gets clawed back at higher incomes. No such problem using a corporation.

[Determinant]

For individuals PHSP premiums qualify as a Medical Expense under the Medical Expense Tax Credit. Tax credits are paid out at the bottom bracket rate and you need to have paid more than 3% of your income in order to start claiming the credit.

Tax credits are generally less attractive than deductions and the income threshold is what catches high earners.

[Ryan]

Corporations are conduits for individuals to conduct business affairs. If you believe a corporation can sign a contract or speak, then you believe you can invite a corporation over for dinner.

[Robert McClelland]

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.

I've been trying to explain this concept to people on several different forums and they always react as though I've grown a second head. If corporations aren't paying for the government services they use the costs are spread to all of us regardless of whether or not we consume their product or service. In other words, corporate tax cuts lead to increased socialism.

[Kevin Milligan]

These are some good reasons for CIT>0. I agree with these reasons. However, all of these benefits (the public cost of bankruptcy, the use of roads, etc. etc.) are a) typically not close to what corporations pay in taxes and b) not at all clearly related to corporate *income*.

[Bob Smith]

Frances,

A couple of points.

Your point that business (small, large, self-employed, whatever) have greater capacity to engage in, for lack of a better word, "creative" accounting than employees is well taken. But that's part of the trade-off inherent in any workable tax system. The government could, I suppose, treat the computation of business income (profit) the way it treats wages, by denying all deductions except for the ones it explicitly allows (and, in fact, that's what it does with respect to capital expenses). But I suspect you can see why, in practice, that isn't workable. The government is poorly placed to determine, in advance, what expenses will be legitimate and which ones won't be. So it goes the other way around, and generally permits the deduction of expenses in accordance with GAAP, subject various statutory and judicial restrictions on what doesn't constitute a business expense (I doubt a guard dog for "home security" would go over well). And if businesses have more opportunity for "creative" accounting, they're also subject to greater scrutiny by our friends at the CRA.

With respect to the advantage of incorporating as a vehicle for savings, I think you overstate the case. Yes, the retained small business income earnings is taxed in the corporation at a preferred rate. But, unless your friend invests that money back into the business (which, presumably, isn't a bad thing), any subsequent earnings on those saving won't be entitled to the preferential small business tax rate, since it'll be investment income, taxable at an effective rate in Ontario of 46.7% (for now, thought that will come down a bit later in the year) - compared with a top marginal personal tax rate of 46.3% (part of the corporate tax is refunded when dividends are paid, but of course, at that time the shareholder is taxed). That's hardly like a unlimited RRSP. (In fact, for those who really want to reduce their tax burden on investment income, the preferred approach is to invest in an Alberta trust, subject to 39% PIT - though the CRA is likely to start taking a run at those soon. That'll be a constitutional nightmare.).

And, of course, that assumes your self-employed friend would be earnning enough money to be taxed at the top marginal rate. But given (a) how few people are in the top tax-bracket (less than 2% of all Canadians, if I recall correctly) and (b) that most of the income earned by that group is from wages and salaries , it's not clear how advantageous this really is a planning opportunity for most self-employed people. Indeed, I'd be curious to see what the profile of self-employed Canadians is, because my instinct is that, for most of them, they're better off as sole proprietors. Or, at least, tax isn't the driving factor behind incorporating.

Finally, at the risk of repeating an old (and bad) economist joke (http://www.indexuniverse.com/sections/research/123.html), if incoporating was beneficial, you (and everyone else) would have done it already.

[Bob Smith]

"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."

Wouldn't the better approach be to just charge road users for the use of roads (through tolls, per mile charges, gas taxes, etc.)? I can't help but think that that's a better way of linking the financing of roads (or many other public services) to the people who benefit from them than taxing corporate income.

[Kevin Milligan]

Page 25 of the 1995 Mintz survey makes the argument about corporate income being an odd base for benefit taxation. http://pages.stern.nyu.edu/~dbackus/Taxes/Mintz%20corp%20tax%20survey%20FS%2095.pdf

Also p. 4 and 5. of the Bird survey here: http://law2.uvic.ca/mcobrien/346/documents/whytaxcorps.workingpaper.pdf

Again, I'm no advocate of CIT=0. In fact, I have seen precisely no one make that argument.

[Jacques René Giguère]

Frances:
Your argument is that corporations must pay in advance for the costs of their future misdeeds,(which we know they will commit).
In banking circles, giving yourself big bonuses that leaves no money to cover your losses and forces the taxpayers to bail you out is known as "pre-looting". You steal before there is public money ensuring that there will be some.
CIT takes back some money before pre-looting happens...

[Bob Smith]

Also, I'm not sure the link between CIT and corporate limited liability is really a strong one. After all, Canada imposes corporate income tax on unlimited liability corporations (formed under NS, AB and BC law). If limited liability were a rational for CIT, you'd think that we might have gone down the US route and allowed unlimited liability companies to be treated as flow-throughts for tax purposes.

[Robert McClelland]

Wouldn't the better approach be to just charge road users for the use of roads (through tolls, per mile charges, gas taxes, etc.)?

While this might work for some government services it doesn't for the majority of them. For example, how do you directly charge consumers for the police services available to a business?

[A.M.]

Frances: Great post (I'm a student of yours from the class of '07.)

My thoughts:

There is always a debate about lowering or increasing corporate tax but generally, I don't know that many people advocate abolition of corporate tax as a practical reality (in theory sure but not in practice). Are they?

I prescribe to the view that a corporate tax is actually good for business and for corporations. One of the key policy concerns that I think corporate taxation addresses is retained earnings and income sheltering by individual stockholders. If the investors were directly taxed for the entire corporate tax burden eventually policy makers would have to restrict the corporations' ability to allocate profits as it sees fit. A corporation would rather pay a tax than be told how it can allocate its retained earnings or that it has to pay out a periodic dividend so that shareholders can meet their tax liabilities.

[Kevin Milligan]

RM re police: how about the same way we charge citizens--property taxes. That seems like a better match to the proportional use of those services than corporate income.

Having corps pay for benefits through the usual means (prop taxes) makes a lot of sense. I need to be convinced that corporate profit taxation is a) the right way to tax for benefits and b) that the current level of corp taxes doesn't exceed any residual not paid by property taxes.

[Frances Woolley]

Kevin - actually Tom Kent made the CIT=0 argument: here. And I'm wondering if some of my fellow bloggers aren't leaning towards CIT=0 - but they can speak for themselves..

Bob Smith, it's interesting how few other cities have followed the London congestion charge example. I'm becoming more and more in favour of financing roads through user fees, but still the impact of doing so on lower income people is a problem. And placing tolls just a few roads leads to empty toll roads and congested free roads (or the madness of heavily laden trucks driving the road through Fraser Canyon because it's free).

On limited v. unlimited liability - I may not be using these terms as a lawyer would understand them. Am I wrong in thinking that, if a company creates a Bhopal-scale or Chernobyl-type disaster and then declares bankruptcy, no one can repossess the shareholders' houses to pay for the cost of the clean-up? That's what I mean by limited liability.

A.M. - great to see you here!

On corporate property taxes - there was a conversation on another post (the one about freezing property taxes Calgary style, I think) recently on how some cities in Ontario, at least, are shifting property tax burdens from commercial to residential property.

[rabbit]

There's a good reason why corporations should be given many of the rights of individuals such as free speech.

And that is because corporations are composed of individuals who should not give up their rights just because they are formed a group. To silence a corporation is to silence those who compose the corporation.

[Mike Moffatt]

"On corporate property taxes - there was a conversation on another post (the one about freezing property taxes Calgary style, I think) recently on how some cities in Ontario, at least, are shifting property tax burdens from commercial to residential property."

In London, ON, the commercial rate is nearly twice the residential rate (source: http://www.london.ca/Taxes/PDFs/2010_taxrates.pdf), plus commercial sites do not receive garbage pick-up or recycling pick-up services. (These are free for residential property, excluding apartments).

Corporations should pay for the fire, police, etc. services they receive. They do so through far higher property taxes.

That being said, I wouldn't and don't support CIT=0.

[Mike Moffatt]

Also, most of your examples seem to be of the small business variety, but a CIT rate cut only affects companies with profit levels of 500K (as companies below that pay the small business rate). So I'm not sure how much of it actually applies (the liability issues certainly do, though).

[Frances Woolley]

Rabbit: "And that is because corporations are composed of individuals who should not give up their rights just because they are formed a group. To silence a corporation is to silence those who compose the corporation."

No, the individuals who compose the corporation can still speak.

One could as easily argue that corporations are composed of individuals who inevitably will die, therefore the life of a corporation must not exceed the maximum human life span. Again it seems that corporations seek equality in terms of rights, but not equality in terms of the penalties (e.g. death) that are inherent in the human condition.

[Tim]

The other thing I'll mention also is unlike in the US Canadian corporations do not generally pay corporate income tax on profits derived from activity outside of Canada. This of course differs from natural persons resident in Canada who must pay income tax on both foreign and domestic source income.

[Ryan]

Again it seems that corporations seek equality in terms of rights, but not equality in terms of the penalties (e.g. death) that are inherent in the human condition.

Corporations can die, they go out of business all the time. The original Dow Jones 30 looks nothing like today's.

Still, it seems odd to read, 'corporations seek equality....' as if they're living beings and not conduits.

I don't think any of this disputes your economic arguments. To me, since corporations are composed of individuals - and only individuals pay taxes - your points are well-taken and may make for a more efficient form of tax collection or distribution of responsibility.

You're right about limited liability, some have pointed to Wall Street firms abandoning partnerships for corporate (public to boot) organization as contributing to excessive risk-taking.

But, still, it is individuals behind the veil of a corporate seal pursuing the risk not a corporation, per se.

It may seem like semantics, but I think not when the claim is made that the US Supreme Court extended free speech to corporations. The idea is individuals do not lose their right because they've incorporated (e.g. the NY Times is a corporation, and the individuals who make it up can use it to express their views).

[Ken]

"A corporation has limited liability", but so do individuals (to a degree). The latter have declared bankruptcy on occasion, to the detriment of .. corporations.

[Patrick]

I agree that corporation have too many rights and privileges and insufficient duties and responsibilities, and they dump all sorts of externalities on us working chumps. But that's a different issue. If we need to rethink the legal framework (and I think we probably do), then let's do it.

Talking about the CIT in isolation is probably missing the point. The question I would prefer (yes, I know it's not the one being asked), would be more general: what tax system will accomplish the goals of paying for all the public goods and services 'we' want?

Anecdotally, having been a small business owner/self employed, I can tell you that it is NOT easy to mess around and inflate your expenses and get away with it. CRA is all over that like wet on water. It's a great way to invite an audit. The the gigantic multi-national I now work for... well, that's a different story (I don't want to say to much; big brother might be watching). And as I discovered, apparently another way to raise their hackles is to be male,earn less than your wife and thus claim the child care expenses. Apparently only tax frauds earn less than their wives.

[K]

Kevin Milligan: "These are some good reasons for CIT>0. I agree with these reasons. However, all of these benefits (the public cost of bankruptcy, the use of roads, etc. etc.) are a) typically not close to what corporations pay in taxes and b) not at all clearly related to corporate *income*."

Me too! Earning above the mean, I pay way more in taxes than I receive in benefits. So I'm going to "go Galt". Gonna take my high end services and go live in the woods where nobody will tax me. And the overtaxed corporations (and lawyers and bankers) can all come with me, and we'll live it up in our libertarian utopia, and then you won't have us to kick around any more...

[Determinant]

Since when is a tax a user fee? I just read Skidelsky's book on Kenyes for today's world and my inner social-democrat is screaming to get out....

[duncan cameron]

I am a big fan of this post. For me economists are people who understand costs, know how to think about real costs, and estimate costs. Frances does a great job of revealing the costs of the corporate form of organization.

[Jon]

The very premise of this post is wrong, at least as it applies to publicly traded corporations.

FASB rules require firms to take charges for liabilities from their activities that are foreseeable by a reasonable, informed person. The officers of a corporation must sign the financial statements and are on the hook for civil and possibly criminal prosecution in a cut-and-run scheme like you propose.

Second, its possible to pierce the corporate shield for all manner of liabilities. What's required under the law is a demonstration that the corporate form is being used to conceal a scam: i.e., just your cut-and-run story. Any corporation established intentionally on nefarious grounds like that would not survive as a liability shield, and at a minimum the officers and directories could find themselves personally on the hook--publicly traded or not.

So we're left with corporations established in good faith, but which fail, and incur unforeseeable liabilities. That strikes me as a small, extreme case which could just as easily befuddled a business structure without liability protection.

So you try to build a case on the basis of moral hazard, but there isn't a moral hazard problem with the corporate form.

[Erin Weir]

Great post, Frances!

I am not sure what to make of Tom Kent advocating zero CIT. The final page of his article states, “profit retained, instead of paid out to the company’s owners, should be subject to tax at rates scaled to the size of the business.”

He also wants to tax dividends paid to non-residents. Outside of RRSPs and pension plans, Canadian residents would pay personal income tax on dividends without getting a dividend tax credit (“Removal of the corporate income tax ends the excuse for concessionary treatment of dividends.”)

So, Kent ends up calling for taxes on profits retained, profits paid out to non-residents, and profits paid out to residents. Taken together, those taxes are pretty similar to a CIT on profits.

[Nick Rowe]

Corporations are financed by equity plus debt. The CIT is a tax on the equity only. If limited liability were the motivation for a Pigou tax on corporations, it would make sense to apply the tax to both debt and equity. The CIT simply encourages the corporation to have a higher debt/equity ratio to avoid the CIT. The bond-holders have limited liability too. If anything, since the corporation is run by the equity holders, not the bond holders, the CIT will increase moral hazard.

But taxing debt+equity isn't right either. The fundamental problem is that the capital of the business is too small to cover the damages in the event of a low probability high cost disaster. A tax on total capital (debt+equity) is a tax on the very reserves that could cover part of the cost of the disaster, and encourages under-capitalised businesses to do the risky jobs. Presumably, since the expected external costs are probably proportional to the business revenue, and negatively-related to capital reserves, the Pigou tax should be on revenue, and there should be a subsidy to corporate capital reserves.

And people have limited liability too, in practice. You can declare bankruptcy when you do something that causes a disaster you can't afford to pay for. The same logic should apply to partnerships and sole proprietorships. There's an externality whenever anyone (corporate or not) does anything (business or not) that has a risk of causing damages that person can't afford to cover.

The fundamental problem is poor persons (whether corporate persons or not) doing things which have a risk of causing big damages. Their assets won't be big enough to cover the damages, so there's an externality. If mandatory liability insurance (like for drivers) cannot cover this problem, the optimal Pigou tax (for both corporations and other persons) would be on something like (Income/Assets). Those with large assets would pay a lower rate of income tax.

Which probably wouldn't be very popular politically.

I think Frances' point about limited liability creating an externality which motivates a Pigou tax is correct. But some of the commenters here should perhaps stop and think before grabbing hold of this theoretical lifesaver to support their dislike of corporations and wanting to tax them. The logic might lead them somewhere they really don't want to go. Pigou taxes on the (asset-) poor?

[reason]

Now think about limited liabiliy hedge funds. They allow rich people to take highly leveraged bets (increasing the up side) but limited liability limits the down side. I saw a post recently showing that indebtedness of the very rich has fallen recently http://economistsview.typepad.com/economistsview/2011/02/inequality-leverage-and-crises.html. Could it be that they are borrowing via limited liability agents, and so reducing their risk? Should we do something about this? It tends to suggest that huge payments to hedge fund managers are stealing from the public purse.

[reason]

K if you are earning way more than the average then you are probably receiving way more than the norm in benefits. Or do you think the mafia would take less than the government does?

[reason]

Frances -
" I'm becoming more and more in favour of financing roads through user fees, but still the impact of doing so on lower income people is a problem."

Surely the answer to that is to give vouchers or cash equivalent. The pareto optimum solution is always to redistibute and charge, but somehow the redistribution bit always gets forgotten.

[reason]

rabbit
"To silence a corporation is to silence those who compose the corporation."

No it is not. It doesn't take away their right to speak as individuals. What really is being decided here is whether they have a right to a megaphone, not whether they have a right to free speech. And even if I accept your argument, doesn't that at least imply some very strict rules on how such speech should be decided amongst the "individuals" involved.

I don't mind people supporting any cause they like, but they shouldn't leave reason behind.

Besides which this is only in regard to politics in which corporations don't have a vote.

[reason]

And rabbit it occurs to me that your argument could only POSSIBLY be valid, if the PURPOSE of the company was political speech, which it isn't. Otherwise the interests of the corporation in no way reflect those of the individual owners (since the purpose of the incorporation is mostly pure fiduciary). Basically, you are saying the Koch brothers have a right to take the money of minority shareholders and use it for their political purposes. Is this feasably reasonable?

[Mike Moffatt]

"I think Frances' point about limited liability creating an externality which motivates a Pigou tax is correct. "

Seconded. Now how would you begin to estimate the optimal Pigovian tax rate?

[anon]

"The very premise of this post is wrong, at least as it applies to publicly traded corporations.

FASB rules require firms to take charges for liabilities from their activities that are foreseeable by a reasonable, informed person."

This is a negligence standard--it does not cover large low-probability liabilities which the corporation cannot insure for. Corporations may be forced to take the optimal amount of care, but they will still engage in more risky activity than would be socially optimal. (Admittedly, this is a hard problem which probably does not have an optimal solution.)

[reason]

"Corporations may be forced to take the optimal amount of care, but they will still engage in more risky activity than would be socially optimal."

Is this necessarily true? The whole idea of limited liability corporations, was to increase the amount of large investment projects that a society could undertake (other than the pure socialist alternative). That does increase risk. But at least when they introduced it, they thought it was better than not doing it.

[K]

Reason:"K if you are earning way more than the average then you are probably receiving way more than the norm in benefits. Or do you think the mafia would take less"

Sorry. It was intended as sarcasm :-(. Badly written. My point was that bankers and lawyers selling services to each other on a desert island wouldn't have a lot of output to enjoy and therefore they must be receiving a benefit from being a part of society that's far greater than what is accounted for by their receipt of direct government services.

[Nick Rowe]

Mike: "Seconded. Now how would you begin to estimate the optimal Pigovian tax rate?"

Good question. I expect "Dunno" wouldn't work as an answer?

Look at all the cases where corporations have gone bust. Look at all their unmet liabilities. Ignore all liabilities of bondholders, workers, retired workers, customers, etc., who knowingly did business with the limited liability corporation. Just look at third party liabilities. Divide it by, ummmmm total revenues of all corporations? That would be a first stab at the optimal Pigou tax on corporate revenues. (My calculation implicitly assumes marginal tax rate should equal average tax rate.)

[Nick Rowe]

Oh, and that tax should presumably be applied to all corporations, including charities like my employer.

[Patrick]

Corporate Criminal Liability:

http://www.justice.gc.ca/eng/dept-min/pub/jhr-jdp/dp-dt/index.html

A little old, but I don't think it changes that much over time.

[Ryan]

@Reason - The folks we are discussing have a megaphone. The question is whether they have the right to use it or whether politicians can enact laws (i.e. McCain/Feingold) to limit there use.

Soros has a megaphone. Why should it matter what form of organization he chooses to advance his causes? Or limit the options others on the other side have available to counter Soros or the Kochs?

As to Minority Investors, there are always agency issues as it relates to governance. Are there any Koch minority investors raising a fuss? What if I don't like how Buffett is managing Berkshire and I'm a minority, passive investor?

[Bob Smith]

Tim: "The other thing I'll mention also is unlike in the US Canadian corporations do not generally pay corporate income tax on profits derived from activity outside of Canada. This of course differs from natural persons resident in Canada who must pay income tax on both foreign and domestic source income."

I don't know who told you that, but it's wrong. The Income tax act doesn't disinguish between Canadian resident corporations and Canadian resident individuals, both are liable to tax on their world-wide income.

What you may be thinking of is Canada's tax regime provides recognition for foreign taxes on certain types of income (i.e., active business income) paid by foreign subsidiaries of Canadian corporations, such that, provided that those subsidiaries pay similar levels of foreign tax as they would in Canada, there's not net income inclusion for their Canadian parents (the rationale for this policy being that Canadian corporations who carry on business abroad through a subsidiary should be in more or less the same position as if they did so directly). Of course, an individual who carried on business directlty in the US would be entitled to a similar foreign tax credit for US income tax.

And while I'm not overly familiar with US tax law, much the same result can be achieved in the US, where US corporations invest into Canada through entities (such as unlimited liability corporations) that are disregarded for US tax purposes (such that the tax paid by the Canadian corporation is considered, for US purposes, to have been paid by the US corporation).

[Bob Smith]

Frances' point about the externality associated with limited liability is a good one, but really has nothing to do with the CIT. As I noted yesterday, the CIT applies to entities which do not have limited liabilities (such as unlimited liability corporations. Moreover, it does not apply to other entities, notably limited partnerships, that do have some degree of limited liability. Admitedly, a creditor of a limited partnership has some recourse to the general partner, but the GP typically will have little to no assets. In any event, if you want to internalize the cost of limited liability, the easier approach would be annual fee to maintain the status of the corporation/limited partnership.

[Joseph]

I wonder if the case a person and a corporation going bankrupt are really symmetric or not? [to be clear, I am really not sure] Most of the concerns that I have with limited liability are moral hazard based, but I worry that it is hard to set policy based on them due to the difficulty in generalizing to all corporations.

Dr. Woolley covered the case of resource extracting corporations. But I wonder about a financial or insurance company; one can run a series of highly leverage bets, extract profit and then leave the as the (inevitable) losses appear. This process seems to work so differently than in a normal industry that it seems hard to consider under the same category. But I wonder if the ability to separate risk and profits leads to bad incentives in these types of firms. I do not think that the same considerations apply to most forms of corporation so perhaps it should be in sector specific regulations (which does, unforunately, make it really profitable to find a way to call a firm of this type something else).

Or maybe it is too early on a Friday to be thinking clearly. :-)

[Bob Smith]

And rabbit it occurs to me that your argument could only POSSIBLY be valid, if the PURPOSE of the company was political speech, which it isn't. Otherwise the interests of the corporation in no way reflect those of the individual owners (since the purpose of the incorporation is mostly pure fiduciary). Basically, you are saying the Koch brothers have a right to take the money of minority shareholders and use it for their political purposes. Is this feasably reasonable?

A couple of points are worth making. First, the right to free speech applies far wider than purely political speech (indeed, I believe the leading SCC case on freedom of speech and corproations deals with advertising). Second, one can readily think of circumstances, where "political speech" is in the interests of corporate shareholders (lobbying for corporate tax cuts, for example). Third, free speech rights are extended to all sorts of collective organizations, regardless of their legal personality, other than corporations (hand's up anyone who thinks a ban on advertising by unions would survive charter scrutiny). In Canada, at least, corporate free expression rights don't depend on the legal personality of corporations. Finally, the rationale for the protection of free speech isn't solely to protect the speaker's right to speak, it is also to protect the listener's right to listen (if they want). Even if one thinks that corporations (and presumably other entities) shouldn't be entitled to free speech protections, surely the individuals who might want to listen to their messages are.

[reason]

"Second, one can readily think of circumstances, where "political speech" is in the interests of corporate shareholders (lobbying for corporate tax cuts, for example)."

That may be but it shouldn't be allowed, since voters have one vote per person and shareholders have one vote per dollar. And to the extent that shareholders are also voters, they can protect their own interests. The idea of democracy is that it provides a countervailing power to economic power. You didn't address the issue of the rights of minority share holders (or the idea that corporations are subject to the law of the land, but rightly have no part in making it). Corporations are given rights and some privileges, but those privileges should quite correctly come with constraints.

The idea of a right to listen is a novel one, but my experience of corporations is that it is much more common for them to rudely invade people's scope of attention than it is for them to be unfairly excluded.

[reason]

"Soros has a megaphone. Why should it matter what form of organization he chooses to advance his causes? Or limit the options others on the other side have available to counter Soros or the Kochs?

As to Minority Investors, there are always agency issues as it relates to governance. Are there any Koch minority investors raising a fuss? What if I don't like how Buffett is managing Berkshire and I'm a minority, passive investor?"

When a public company is registered it is registered with purpose, and stictly speaking it only exists for this purpose. If the purpose was explicitly for political lobbying and all the investors in the company knew that - then I think I could just about accept it. But investors in general invest in many companies, and so their interests are orthogonal to the interests of any given company. This wouldn't matter if corporate power wasn't so big.

And as a company is set up by Govenment fiat, shouldn't it least be tied down to playing by the rules. Lobbying to change the rules is borderline cheating (it is like starting a game of monopoly and trying to control the rules during the game). If anybody should be against that it is skeptics of government.

But my main objection (as in many things) is not philosophic, it is practical. People have been shown to be suspectable to exploitation by persuasive emotive advertising, and this tends to benefit the already powerful (since the most effective medium is expensive mass communicatios media). We should be aware of this and try to level the playing field.

[reason]

P.S. I know - we are drifting wildly off topic here. I won't continue this.

[Ryan]

@ reason

You make many good points. Buffett came to mind, because a few years back there were some shareholders making a fuss about the charitable donations being made to Planned Parenthood.

People have been shown to be suspectable to exploitation by persuasive emotive advertising, and this tends to benefit the already powerful (since the most effective medium is expensive mass communicatios media).

That is a strong practical point. Take the Citizens case, that was (iirc) a video or so-called documentary about Hillary Clinton done by political opponents. Politicians, via McCain/Feingold, made this against the law because it was done by a corporation.

I'm uncomfortable with politicians limiting debate that is aimed at them. But, as you show, it is a tricky issue.

[Ryan]

Reason - just saw your p.s. after posting the above. Fair enough on dropping it as off-topic. Thanks for your replies on the issue.

Best,
Ryan

[Lindsay]

Determinant: "Since when is a tax a user fee? I just read Skidelsky's book on Kenyes for today's world and my inner social-democrat is screaming to get out...."

Taxes are mandatory levies that are not related to any specific benefit or government services whereas user fees are payments levied to recover the cost of a particular good and service. Case law (see Eurig Estate (Re), [1998] 2 S.C.R. 565) provides additional assistance in clarify the difference between a tax and a user fee. First, tax revenues are used to offset general expenditures where as revenue from a user fee must be used to defray or recover the costs of providing a service from those who benefit. That is, revenues from user fees must be earmarked and spent purposefully. Second, for a user fee the fee charged cannot exceed the cost to government of providing the service. As interpreted by the courts this mean that there must be a reasonable connection between the service provided and the amount charged. No such criteria is applied to taxes.

Congestion charges and road tolls as referenced by Frances can indeed be user fees if properly designed and implemented to meet the criteria that distinguish a tax from a user fee. In fact, many cities in Canada should be pursuing congestion charges far more rigorously.

Frances, the regressive impacts of a congestion charges are very dependent on the socioeconomic and geographical considerations of the city where the user fee is under consideration as well as the current funding of, fees for, and taxation to support transportation infrastructure. The status quo has transportation infrastructure funded through property taxes, the level of which has no link to the consumption of the funded services. Property taxes are certainly not the most progressive tax out there. Much like with consumption taxes, any regressive effect of a congestion charge/road toll can be minimized or even reversed with careful design, revenue uses, and compensation mechanisms.

[Geoff NoNick]

From a non-economic viewpoint, the personhood of corporations and CIT=0 is best defended as follows:

"Corporations are conduits for the collective action of individual persons. Why, went acting in concert using this particular form of organization, would those persons be denied rights that they have as individuals acting alone, and why would they be taxed an additional amount?"

Bear in mind that corporations are not actually zero-liability - the liability for acts of the corporation is just borne by the directorship rather than the shareholders.

Also, most of Frances points re: write-offs of personal expenses for small corporations apply in the case of non-incorporated sole proprietorships. In fact, they apply more in some cases - as a sole proprietor I can carry business expenses against my non-business income. Corporations need a revenue stream to write off expenses; sole proprietorships do not. Does this mean we should apply an additional tax on entrepreneurs with registered sole proprietorships?

[Bob Smith]

Geoff NoNick: "Bear in mind that corporations are not actually zero-liability - the liability for acts of the corporation is just borne by the directorship rather than the shareholders."

That isn't generally true. In some circumstances, directors can be held liable for certain obligations of the corporation (failure to collect and remit certain withholding taxes, and sales taxes, and limited liability for up to 6 months of unpaid salary and wages), but those are statutory exemptions from the general rule that liability is limited to the assets of the corporation.

[Geoff NoNick]

Bob - True, insofar as we're talking about financial liability rather than criminal liability. But in the case of financial liability, the corporation is lent money in exactly the same way that individuals are - by having its overall credit-worthiness assessed. If the lenders miscalculate the credit-worthiness of the corporation, or if the risk of their loan is crystallized, I don't see that being an problem inherent in the organizing structure. Certainly, the very real persons who took out home loans far beyond their means in the U.S. have cost that society quite a bit of money; bad risks are bad risks.

And in the case of small corporations, of course the matter is moot - no one will lend to a mom-and-pop corporation without the co-signature of mom or pop themselves, so the liability in those cases is, for all practical purposes, borne by the shareholder/directors.

[Bob Smith]

Geoff,

Just to be clear, I don't have any objection with limited liability for corporations either, but the point is that liability is, with a few exceptions, limited. The fact that, as a commercial matter, shareholders may have to guarantee loans merely emphasizes that point. In any event, I don't think Frances concern is with respect to intentional creditors of the corporation (lenders, customers, employees) who, after all, choose to contract with a corporation. I think the concern is more with unintentional creditors (think fisherman in the gulf of mexico).

With respect to criminal liability, directors aren't criminally liable for the misdeeds of the corporation. They can, however, be held criminally liable for their own misdeeds in respect of the misdeeds of the corporation.

[Geoff NoNick]

Bob - Agreed with respect to the fact that it's "negative externalities" that Frances is after. I just wanted to rule out some common misconceptions about the extent to which corporate liability is truly limited.

Regarding the Gulf of Mexico argument, I think the counter-argument is that the spill was not the work of a single corporation, but of (many) millions of shareholders acting in concert, each of whom pays for their own personal potential negative externalities in the form of personal income taxes. Does it make sense to levy a risk premium on mom and pop corporations for what large, publicly-held corporations may do?

If your goal is to apply a risk premium above and beyond that of the collective risk of all of the individual shareholders, surely there's a better way to structure that kind of thing. Like, for instance, obliging anyone (real person or legal fiction) running a drilling operation in U.S. waters to take out liability insurance against such a potential catastrophe. If what we're talking about is insurance, then let's just buy some insurance instead of levying a CIT that goes into general government revenues and gets spent on bread and circuses.

[Stephen Gordon]

Frances' point about the externality associated with limited liability is a good one, but really has nothing to do with the CIT.

That's sort of where I am here.

[Frances Woolley]

Anyone remember the Monty Python sketch about the Argument Clinic?? When the blogosphere feels too much like that, I hide...hence the lack of reaction to all of the comments.

For those who are interested in facts and figures:

In 2009/10, corporate income taxes were 13.9% of federal revenues, or $30.7 billion. Can it be argued that this is largely a withholding tax, as corporate tax revenues are eventually refunded? To figure that out, one has to comb through the tax expenditure accounts and peruse the various memorandum items. The dividend tax credit is about $3.8 billion, the partial inclusion of capital gains costs about $2.8 billion, but there's a load of other provisions designed to integrate personal and corporate income taxes.

A few responses:

Patrick - men claiming child care triggers an audit? Plausible - fascinating.

Various clarifications on small business taxation, sole proprietorships, etc - thanks, WCIers, for sharing your collective wisdom...

Nick, Mike, Geoff, others - on how to estimate/design a Pigouvian tax on corporations. I don't know. It's hard. Moreover, one has to take into account the fact that the current corporate income tax is largely a withholding tax that gets refunded to taxpayers in the form of a dividend tax credit -

Duncan Cameron and others: Stephen Gordon has written a series of posts on Economic Policy Advice for the NDP.

Here's mine: get some really smart people together who actually understand corporate taxation, corporate liability, and so on, and take up this issue. What are the responsibilities and duties that are associated with the privileges of incorporation? Are there ways of improving corporate governance in Canada?

It's difficult because the best intentioned policies can so easily go badly wrong - e.g. legislation that required companies to disclose executive compensation - information which executives then used to lobby for higher salaries ("I would like to be paid 10% more than the average salary of executives of firms in my industry" - do the math on that one).

[Frances Woolley]

Stephen: "Frances' point about the externality associated with limited liability is a good one, but really has nothing to do with the CIT. That's sort of where I am here."

Economists generally agree that externalities should be internalized. A Pigouvian tax is one way of internalizing them. True, CIT isn't perfect as a Pigouvian tax - it's like a tire tax or vehicle registration fees that imposes a tax on all car owners regardless of how much they use the roads.

I'm open to other ideas.

But I'm wondering how many people writing here have been up north and seen the destruction - understand the scale of harm - have stood on top of the Midnight Dome in Dawson City and looked down at the placer mining scars - every river valley for miles turned upside down, the topsoil stripped off and left to float downriver - nothing left but piles of rocks where nothing will grow. I went there as a kid. I went back again just a few years ago. Nothing had changed. Once an environment has been destroyed like that it takes a long time to heal.

[Mike Moffatt]

For what it's worth, I grew up about 200 *feet* away from Pottersburg Creek (which is well known in London for all the wrong reasons):

http://www.londontopic.ca/article.php?artid=8591

[Stephen Gordon]

Okay, but not all corporations are engaged in strip mining.

And almost everyone and every organization has the potential to wreak enormous havoc for private benefit and at others' expense. For example, the professors' union at Laval could go on strike and wipe out a year of the lives of tens of thousands of students at a crucial point in their careers.

I don't see why the CIT is the remedy for these problems. Things like carbon taxes or stronger regulations requiring firms to clean up their messes seem to be far more appropriate.

[Bob Smith]

"But I'm wondering how many people writing here have been up north and seen the destruction - understand the scale of harm - have stood on top of the Midnight Dome in Dawson City and looked down at the placer mining scars - every river valley for miles turned upside down, the topsoil stripped off and left to float downriver - nothing left but piles of rocks where nothing will grow. I went there as a kid. I went back again just a few years ago. Nothing had changed. Once an environment has been destroyed like that it takes a long time to heal."

To which the owner of a web design company might ask: "Whats' that got to do with my company's income?" Certainly, in the mining context, that's an argument for higher royalties or, at least, royalties linked to environmental harm. And its an argument which really doesn't depend on whether the miner is a corporation or not.

[Mike Moffatt]

Idea: Employers in Ontario pay WSIB premiums to cover workplace safety issues:

http://www.wsib.on.ca/en/community/WSIB/230/ArticleDetail/24338?vgnextoid=c6aae35c819d7210VgnVCM100000449c710aRCRD

"Your premium payments will depend on the health and safety risk of your type of business, the size of your payroll, and on your company's health and safety record."

Why not have the same type of system for environmental risks? (Except base the system off of revenues, not size of payroll).

[Mike Moffatt]

FWIW, the Green Party has naturally spent a lot of time considering these issues (corporations and the environment) and has a comprehensive plan in their Vision Green document:

http://greenparty.ca/issues/vision-green

Note: This should not be seen as an endorsement of any particular policy in their platform (or their platform as a whole).

[RSJ]

"Why not have the same type of system for environmental risks? (Except base the system off of revenues, not size of payroll)."

That's exactly what we should do, in theory, but in practice, indemnifying against open-ended and ill-defined tail risks such as this is going to be very expensive. Think lead paint remediation, asbestos, nuclear waste disposal, DDT, etc. I live in a Victorian with lead paint, built in the 1890s. I just don't see a painter in the 1890s being able to engage in Coasian bargaining to ensure that he paid the social costs of using of lead paint. It's not realistic.

The government will end up providing this insurance anyways, and will need to absorb the occasional huge event. This is similar to deposit insurance, IMO, and like deposit insurance, it is much cheaper to regulate behavior than to rely on the tort system to punish ex-post. This is also exactly why we need both LLC as well as regulations.

In terms of externalities as a justification for CIT -- I just don't see this as relevant. I think retained earnings need to be taxed, but it's inconsistent to have interest payments be deductible while dividends are not. Either they are both taxed equally, with the amount taxed rebated to creditor households, or they are not taxed at all, with creditor households paying the same taxes on capital income as they pay on wage income.

For me, the default assumption should be that all income is taxed equally by the households that receive it, whether that is capital income, wage income, inheritances, etc. I don't like taxes on expenditures of any kind -- once you receive income, from whatever source, you should pay taxes on it and then be able to employ it for any use without the government putting its thumb on the scale, encouraging households to remodel their kitchens rather than buy back-scratches. Just my 2 cents :)

[ian lee]

Frances,

I must confess that after reading the several excellent primary posts by Stephen, Mike and you concerning CIT, and the ensuing excellent responses concerning appropriate CIT levels, I am confused concerning the "confusion" or substantial disagreement concerning level, incidence and utility of CIT, in light of the comprehensive research undertaken by the OECD Tax Policy Studies branch that culminated in the 157 page summary report published by the OECD, "Tax Policy Reform and Economic Growth" 2010.

The Forward to this Report states:

"This report discusses how tax structures can best be designed to support GDP per capita growth. The analysis suggests a tax and economic growth ranking order, according to which CORPORATE TAXES ARE THE MOST HARMFUL TYPE OF TAX FOR ECONOMIC GROWTH [Ian's caps],followed by personal income taxes and then consumption taxes, with recurrent taxes on immovable property being the least harmful tax. A revenue neutral tax reform that shifts the balance of taxation more toward consumption and recurrent residential property taxes, could thus strengthen the growth of output in the medium term".

By my count, the phrase, "corporate taxes are the most harmful type of tax for economic growth" is repeated at least 20 times throughout the 157 page report and certainly in every chapter (and thus does not appear to be a mistake) - and is repeated in some of the other OECD publications in this OECD Tax Policy series.

IF I understand the OECD Tax researchers correctly, they seem to suggest that this is an issue that has been settled by the extant research.

Can you clarify or illuminate?

Ian

[Erin Weir]

So, if the OECD repeats something enough times, it’s settled?

Remember when the OECD complained about Canada’s “years of expenditure increases above trend economic growth” even though its own data showed Canadian public spending decreasing as a share of GDP?

What about when the OECD recommended privatizing Canada Post and then admitted, “we haven’t done a study of the postal sector or Canada Post”?

[Patrick]

I just don't see any reason why Jane Q. Citizen is going to impose 'less stuff' constraint on herself for the sake of abstract health risks or distant threats to plants and animals she will never see.

Cleaning-up messes is expensive. By leaving the mess we all get cheaper stuff as a result. And it seems that we like cheap stuff more than we like pristine wilderness or cancer free organs.

I suspect it's going to take a global disaster on a human time scale for something to change. The only candidate I see is perhaps if global warming causes rapid sea level rise. If Florida disappears within 30-50 years, that might do the trick. Short of that, I have little hope that the destruction will stop.

[Determinant]

If we privatize Canada Post, there is a legitimate question of who would want to buy it. Postal volumes and revenues are steadily declining. The Internet has cut into much of Canada Post's business and the profitable parcel and courier service has direct competition in the form of Fedex and UPS.

[Nick Rowe]

No need to hide Frances. Your post has sparked a very good discussion. I will try to post something inflammatory later this evening. Maybe something about the improvident poor, and MMT?

[Mike Moffatt]

I'm looking forward to Nick's piece: "Should the poor be allowed to use public parks?"

[Mike Moffatt]

"If we privatize Canada Post, there is a legitimate question of who would want to buy it."

That's more than a legitimate question. Wonder if the CUPW would take it for $1?

[edeast]

I've worked in Fort Mac, simply awesome. I like the post, cit as an insurance buffer that regulations aren't fully covering. unknown/unknowns.
There's crazy political pressure, Stelmach a couple years ago tried to raise revenue from Oil, Gas with the NRF, then the wild rose stepped up. Also at last years conservative convention, there was another motion put forward, on measures to increase the incentive for capital development in the oil/gas sector, simply unreal.

[Determinant]

MMT and the "improvident poor"? Suddenly I'm getting an urge to hurl the Communist Manifesto at Nick.

[Mike Moffatt]

"Suddenly I'm getting an urge to hurl the Communist Manifesto at Nick."

Now I *know* the CUPW would buy that for $1.

[edeast]

I don't want my comment to sound anti-oilsands, one of my favorite lines from a chem prof, is that we are cleaning up the world's largest oil-spill. If you want to help the tailing's ponds, try and develop a flocculant, and you could get pretty rich. Get rid of the clay colloidal suspension. Allow water to evaporate, save the birds, which are more of a signal to labour relations than of environmental negligence. That said building the ponds right beside the river, esp the case for Suncor, doesn't look like the smartest move.

[duncan cameron]

Frances in the early 1990s a group of highly experienced people got together in Ontario under the banner of the Fair Tax Commission and produced a good report, and some very interesting studies.
With Jack Mintz, and some business Executive Vice-President taxation, Andrew Jackson, a brilliant woman accountant, and others, our group on a corporate minimum tax had trouble reaching a conclusion. The NDP did bring in such a tax. It was not hard to do; the U.S. had one, and Ontario followed the precedent. In all modesty, I had written as such in my regular column in the Financial Post before the Commission was created. I had also published the list of corporations that were paying no tax at all at that time. This did become an election issue and helped Bob Rae get out the union vote for the first time provincially or federally in Ontario. It probably contributed to my losing my regular FP gig as well.
Unhappily Premier Rae, chose not to use his report to prepare his re-election campaign, he was defeated by "the tax fighter" Mike Harris who came from third to win.
In general I follow Aristotle on issues of justice, and taxes can be conceived as justice issues. Do the corporations get what they deserve? I think they deserve to pay more taxes, and your reasons are very compelling as to why that should be the case. The balance sheets of companies, profit and loss statements, etc. do not begin to account for the social and environmental costs of corporate organization of production and exploitation of resources. This is not an argument against corporations NIck, it is argument about how we account for their real costs to Canada and the world.
Arguments against CIT rely on utilitarian theories about the greatest good for the greatest number, or more often Kantian arguments about the absolute rights of property owners. Aristotle makes more sense to me because he starts from the idea that we are citizens (political animals). Other prefer to see us primarily as consumers, or bearers of rights in the Kantian sense. Hayek would be in the latter group for instance. Among economists Sen stands out for his sympathy for Aristotle.
Most economists live and breath utilitarian air, and of course there is much to be said for JS Mill. However, I find that dumbing down utility to preference as often happens, and substituting taxpayer or consumer for citizen, limits the scope of what we should be discussed.

[ian lee]

Erin,

The academy, NGOs, unions and some public servants, have recently strongly criticized the Conservative Govt “for not being evidence or research based" - while presumably we are.

However, if we are to be credible in making such a claim, we cannot cherry pick the research simply on the basis that we like the outcomes or dislike previous findings. Credible researchers must investigate the research in question to determine if for example, it is robust, legitimate, credible, rigorous, logical, empirical.

Thus, your comment, "must we accept the OECD research because they repeat it" and then to invoke a non sequitor i.e. the Post Office, is to engage in the same conduct that we criticize in political parties. You are attempting to trivialize the research – and not challenge or interrogate the research. Researchers must investigate to determine if the research was e.g. peer reviewed e.g. was the lit review comprehensive, e.g. methodologically sound? E.g. biased? E.g. tainted etc. etc?

To dismiss it out of hand, without serious consideration, is no different than political parties that dismiss or refuse to review the research evidence they do not like.

On issues dealing with business or economics and public policy, we should try to be evidence based by reviewing what the OECD, UNCTAD, WTO, WB, IMF - and YES - the ILO - to determine what these international, non-profit institutions are discovering in their research.

However, this is merely the starting point of our own discovery - not the end point as you suggested.

[ian lee]

Erin,

Apologies. I forgot to mention that these international organizations e.g. OECD, UNCTAD, are international government institutions, funded by governments. Indeed, some are sub units of the United Nations.

And these international bodies obtain much of their empirical data from the national government statistical agencies of countries around the world e.g. Stats Canada, and they work closely with academic scholars, union researchers such as yourself, and NGOs from these countries.

All in all, the rigor and quality of these researchers, national statistical agencies and international research organizations e.g. OECD, is very distinguished.

By the bye, this was why I was so deeply dismayed by Canada's recent CPP pension debate. I was unable to locate a single reference to the OECD 2009 Pensions at a glance +500 page report that emprically demonstrated that Canada's elders were 4th or 5th wealthiest in the OECD i.e. thus the world and that Canada experiences one of the lowest elder poverty rates in the world. Yet, I could not find any reference at all to this salient empirical information in any of the Op Eds published on the CPP debate. Nor was there any mention of the $6.2 trillion in net household worth including $2 trillion in net residential real estate.

A genuine transparent policy debate must acknowledge and incorporate all relevant legitimate empirical information that illuminates the issue. Omission of critical empirical data from legitimate international research organizations does not meet this standard.

[Travis Fast]

@ Marc
Yah the Manifesto what a rag it demanded utopian things like the vote for people without property. That Marx and Engles, what a bunch of dumb asses. Meanwhile the apologist school was running around saying the sky would fall if that happened. Oh and Capital has been outselling the Road for a while now: markets never lie. Yada Yada Yada fish paste.

What is this sophomore hour?

[Erin Weir]

Ian,

If the OECD’s research is so rigorous and comprehensive, why not draw upon that research to provide specific responses to the points which Frances (and others) have raised? Just repeating the OECD’s conclusion that corporate taxes are bad does not advance the debate.

I am happy to admit that my ad hominem attacks on the OECD did not advance this debate either. But that was my point: if you are going to make an argument from authority, then the natural retort is to question that authority’s credibility.

Let’s discuss the substance of the analysis rather than its provenance from the OECD.

[Stephen Gordon]

Or you could read what the OECD report said and explain to us why it's wrong.

Frances' point doesn't invalidate it; the link between "corporate externalities exist" to "therefore we should raise/not cut the CIT" doesn't seem to be there. Why would a higher CIT reduce those externalities?

And why is the burden of proof never on you? Why aren't you citing - or even writing - empirical studies documenting how higher CIT rates reduce the costs associated with negative externalities of corporations?

[ian lee]

As usual, Stephen is far more trenchant.

However, Erin, I will provide what I think are the core arguments provided in the foundational article by Johansson, Å. et al. (2008), “Taxation and Economic Growth”, OECD Economics Department Working Papers, No. 620, OECD Publishing.

This article is cited often in the 2010 OECD Report, whicxh I cigted previously.

Below, I have copied key findings quotes from the Johansson article.

1. Corporate taxation affects capital formation
Empirical evidence obtained from both firm-level data covering a sample of 14 European OECD
countries and industry-level data covering 21 industries in 16 OECD countries suggest that investment is adversely affected by corporate taxation through the user cost of capital (see Box 7, p. 33).

The investment-to-capital ratio is negatively affected by increases in corporate taxation. The long-run user cost elasticity is estimated to vary between -0.4 and -1, depending on the empirical specification, p. 34

2. Corporate taxation affects productivity in several ways
First, as with labour taxes, corporate taxes can distort relative factor prices resulting in a re-allocation of resources towards possibly less productive sectors (e.g. non-corporate sector) which may lower total factor productivity
Second, complex corporate tax codes can cause high tax compliance costs for firms
and high administrative burdens for governments, which absorb resources that could be used for productive activities, causing productivity and efficiency losses.
Third, high corporate taxes may reduce incentives to invest in innovative activities by reducing their after-tax return.
Fourth, to the extent that corporate taxes reduce FDI and the presence of foreign multinational enterprises they can hinder technology transfers and knowledge spill-overs to domestic firms (see below).

Also, corporate taxes distort corporate financing decisions, favouring debt over equity because of the deductibility of interest from taxable profits. This can affect TFP by distorting the allocation of investment between industries, favouring those that find it easy to raise debt finance and disadvantaging those that have to rely more on equity, such as knowledge-based industries that invest heavily in intangible property.

The main empirical results concerning the influence of corporate taxes on TFP at the firm-level are (see Schwellnus, 2008 for details):

Lowering corporate taxes is estimated to boost firm-level TFP in profitable industries (Table 9, Column 1). A simulation experiment indicates that the effect of a reduction of the corporate tax rate from 35% to 30% on the average yearly TFP growth rate (over 10 years) would be 0.4 percentage points higher for firms in industries with median profitability than for firms in industries with the lowest level of profitability. Under the assumption that the effects of corporate taxation are close to zero for firms with the lowest tax base, this may be interpreted as a median effect. Given that trend TFP growth of OECD countries averaged around 1.1% over the period 2000-2005 (OECD, 2007e) the simulated increase in TFP growth due to a tax reduction would seem to be an upper bound estimate. The effect of this tax cut on TFP depends on the industry structure and this reduction would increase the average annual productivity growth rate by 0.4 percentage points more in an industry at the 75th percentile of profitability than in an industry at the 25th percentile of profitability.

The negative effect of corporate taxes is uniform across firms of different size and age classes, except for firms that are both small and young. This may either be due to some countries’ exemptions or reduced rates targeted at start-up firms or to their low average profitability, which both reduces the amount of their effectively paid corporate (Table 9, Column 2).

The main empirical results obtained at the industry-level are (see Vartia, 2008 for details):
Lowering corporate taxes is estimated to boost TFP in profitable industries (Table 10, Column 1). A simulation experiment indicates that the average effect (over 10 years) of a reduction of the corporate tax rate from 35% to 30% on the yearly TFP growth rate would be 0.08 percentage points higher for industries with the median profitability than for an industry with the lowest level of profitability. As mentioned above, this may be interpreted as a median effect. The effect of this tax cut on TFP depends on the industry structure and this reduction would increase the average annual productivity growth rate by 0.08 percentage points more in an industry at the 75th percentile of profitability than in an industry at the 25th percentile of profitability.

The empirical results using industry-level data on a panel of 12 OECD countries covering 21 industries over the 1981-2001 period suggest that the average effective corporate tax (AETR) has a negative effect on TFP. As pointed out in Box 4 and Box 9, the estimated effects are significant and give qualitative information about the sign of the effect of effective taxes on TFP, but the size of the effects is somewhat larger than expected. A simulation experiment indicates that the effect of a reduction of the effective tax rate from 35% to 30% on the average yearly TFP growth rate (over 10 years) would be 0.1 percentage points larger for an industry with the median profitability than for an industry with the lowest level of profitability. As discussed in Box 9, this may be interpreted as a median effect. The effect of this tax cut on TFP depends on the industry structure and this reduction would increase the average annual productivity growth rate by 0.1 percentage points more in an industry at the 75th percentile of profitability than in an industry at the 25th percentile of the distribution of profitability (see Vartia, 2008 for details).

Hope this provides some of what you are seeking.

Ian

[marcel]

As ever, you Canadians are behind the times. When it comes to constitutional rights for corporations, you ain't seen nothing yet.

Scalia and Thomas are soon to be put in a bind. On the one hand, they strenuously disagree that the US Constitution guarantees a right to privacy. On the other, corporations are now claiming just that right. I think the likely third hand these two will choose is that the constitution guarantees a right to privacy for corporations but not for natural humans, probably on the grounds that corporations cannot engage in sex or any of the other messy, sinful, activity related to that.

[Georgian]

Ian Lee,

I presume you are the Assistant Prtofessor at Carlton's Sprott School of Business. And if so, I note you have prepared papers on competitiveness.

Given the amount of criticism from a number of individuals concerning the lack of competitiveness of Canadian managers, and lack of innovation and lagging productivity, where do you place CIT cuts of 1.5%-3% on the priority list for gov't actions to address these concerns? Top priority?

[ian lee]

Georgian,

Some years ago in the 1990s, I used the word "competitiveness". However, per Krugman's frequent hectoring (?) and the sage writings of learned economists such as Nick Rowe and Stephen Gordon, I learned the error of my ways and now stand corrected. I now use the word that is commonly used - productivity - necessary to support a high and real increase in the standard of living.

As Gov Carney noted recently, Canada dropped from 3 to 15 in the OECD in terms of our productivity.
Carney, as have many others, identified several explanations:
- under investment in ICT
- under investment in M & E
- ineffective exploitation of capital investment

However, these failures are due, to a failure to compete aggressively. Canadian firms are not generally as aggressive as American firms.

This is largely because we have protected our markets for over 100 years. While the FTA and NAFTA have gone a long way to correct these policy failures, there is still substantial protectionism in our laws. Think of the just awful agricultural marketing boards or laws targeting foreigners for discrimination in telecom or banking or airlines.

The dark and dirty secret is that firms i.e. managers, do not like to compete. As Adam Smith noted 300 years ago, when business people get together, in short order the discussion turns to a conspiracy against the public good. Potash is an excellent recent example.

Firms will only compete when they are FORCED to compete. By removing protectionist policies that protect telecom, banking, agriculture - see the excellent final 2008 report: Compete to Win - we FORCE firms to become more innovative, invest in more ICT and M&E and use capital more strategically – and those firms that do not will die in the face of new competitors.

Thus, I rank the removal of protectionist policies at the top of the list, followed by a much stronger AIT removing most/all interprovincial barriers, followed by reduction or elimination of corporate taxation (for the reasons provided by the OECD and related research).

[Georgian]

Thanks,

You made my point. Your third priority is by far the easiest to accomplish, and arguably the least effective. How Canadian.