Corporate taxes and responsibility to the common good

Public debate about how to deal with Canada’s $53.8 billion deficit has largely focused on spending cuts. Prime Minister Stephen Harper has explicitly ruled out the possibility of tax increases (except for an increase in EI premiums), while Liberal leader Michael Ignatieff has suggested a freeze on continued corporate tax cuts until Canada is in better fiscal shape. The New Democratic Party has consistently called for the repeal of corporate tax cuts to restore government revenue. In April, nearly three-fifths of senior executives polled said they believed some kind of tax increase would be necessary to deal with the deficit. So far, however, there hasn’t been much debate about this option in Canada.

While responding to the deficit and appropriately and sufficiently investing in social security may require a rise in several different taxes, today I want to take a closer look at corporate taxation. The corporate income tax rate in Canada is currently 18%, mid-way in a series of scheduled cuts aiming to bring the rate from 22% to 15% by 2012. The total cost of corporate tax cuts is projected to be $13.8 billion annually when they are fully implemented. In 2009-2010, corporate tax cuts cost Canadians $7.1 billion, or 13.2% of the federal deficit.

To pay for these tax cuts with spending cuts, we are essentially asking the unemployed, poor, and economically vulnerable – those who already suffered the most from the recession – to shoulder the burden of recovery by giving up valuable programs and services. We’re insisting that profitable corporations can’t afford to pay more in taxes, but the poor can afford to pay more in services that they’ll need to procure themselves or in lost income security.

Furthermore, by aiming for a 15% corporate tax rate, we are asking profitable corporations to pay only the same level of tax as Canadians earning less than $40,000 a year. Why should corporations pay the same rate as low income Canadians? Even if the rate returned to 22%, that would be the same rate as Canadians earning between $40,000 and $80,000 a year which is still very middle class.

There are some who would argue that Canada’s tax rates need to be this low in order for Canada to be competitive. However, Canada already has the second lowest corporate income taxes in the world, according to KPMG. KPMG also ranks us as the second most competitive country in the world, relying largely on business costs in determining their ranking. Another global competitiveness survey, the Global Competitiveness Index of the World Economic Forum, places Canada 9th – but well behind Sweden, Finland and Denmark, all of which have higher corporate tax rates.

Others would argue that corporate profits are taxed at a higher rate, because they are also taxed once they are paid out as dividends to shareholders. However, some profits are paid out of the country to foreign investors and are never taxed again. As well, shareholders who receive Canadian dividends are allowed a dividend tax credit, exempting part of their income from taxation in recognition of the fact that tax has already been paid on this income. Similarly, only 50% of capital gains are taxable.

Most importantly, corporations themselves benefit from the government programs and services paid for by taxation. Without physical infrastructure like roads and bridges and financial infrastructure like the monetary system and social infrastructure that contributes to a well-educated and healthy workforce, businesses would not be able to produce profits. Surely, there is a responsibility inherent in this benefit to contribute towards these programs and services – a benefit that lies with the corporation itself and not simply wealthy Canadians who profit from shares.

The average Canadian corporation probably benefits more from public health care (which is a huge cost to employers in the United States), low cost, high quality education, and the monetary system than the average low income Canadian. Why should their contribution to these public programs then be the same?

Corporations have a responsibility, just as individuals do, to contribute to the common good. This is a responsibility that no economic theory can argue away. Repealing the recent corporate income tax cuts would be a good start.