From my perspective, corporates are “people” only as a legal convenience: they are better thought of as devices that operate inside the economy. The economy takes in labour, land and natural resources; it spits out goods, services and pollution; money, in the form of wages and capital gains, flows around:
Concrete inputs and outputs are easy to tax. Money is abstract, but because wages and capital gains are attached to people, they can easily be taxed. Whereas corporate profits are an abstract thing that exists entirely inside the economy.
I feel like taxing corporations just adds friction to the gears of the economy – wouldn’t it be better to run at full steam and tax the interfaces? As Doug Saunders points out, large corporations are good at avoiding taxes (eg: Ikea and GE pay no taxes). Because corporate taxes are inside the economy, depending on elasticities taxes could ultimately be shifted to any part, including wages and consumer prices. For example, HST is a corporate tax cut, because it reduces the taxes paid between corporations through the supply chain, but it could result in lower prices and more jobs (nobody knows what its long-term impact will be!).
It seems like we should cut corporate taxes with corresponding increases in taxes on land, natural resources, capital gains and pollution. But although corporate taxes may not work very well, they might be more politically viable than other taxes, and are better than no taxes at all – the federal Liberals and Adrian Dix’s BC NDP are both campaigning to raise corporate taxes. And there might be no point in unilaterally cutting corporate taxes lower than other jurisdictions.
I think I agree that ideally corporate taxes would be 0 and taxes on goods & services, wages, pollution should make up for that. However, I’m not sure how well that would work in practice: if the corporate tax rate gets too low relative to wages and other individual income, it could get too tempting for people to incorporate for tax purposes. That’s tax avoidance, and the CRA has ways of detecting that, but as with other crime in general, it’s better to prevent than have to punish.
I’m not sure about more highly taxing the inputs (labour, land, resources). Isn’t the general rule that you should more heavily tax things that you want to discourage and avoid taxing things you want to encourage? Presumably, we want to encourage corporations to “consume” labour, so maybe taxes on labour should be reduced, too. Aren’t payroll taxes basically a tax on labour for corporations (and other employers) and a tax on wages for workers? Although, by that logic, I suppose higher taxes are called for on resources and land, since we want to discourage excessive use of those, or at least encourage efficient use.
IANAE, but I’ve heard several times that a value-added goods-and-services “sales” tax is the best kind of tax because it distorts the economy less than income taxes.
So what would be the best balance of taxes that could also work in practice (note: I don’t mean be political feasible to sell)? I think:
If I’m right, this confirms what I’ve suspected: the federal Conservatives are right about some things, the federal Liberals are right about others, and the NDP are right out.
@Don: The potential problem with that tax regime is that it might end up regressively taxing the poor in favour of the rich — sales taxes effect the poor more because they spend proportionally more of their income, whereas corporate/investment income is something only the rich have.
That said, if I had my druthers I would never pay into EI again — it’s a black hole.
And, yeah: if the corporate rate was zero I would demand to be a consultant on every project.
@Jack – Good point. Possibly my system could be improved by adding a large universal refundable tax credit – a direct income supplement.
Make the first $30k tax free, then tax the excess sufficiently to guarantee everyone in the country $30k per year.
This would probably destroy the nation somehow (inflation, eg), but it might be fun
Yeah, CPP and EI payments are what I had in mind as labour taxes. Proponents of land value taxation argue that it’s not distorting of the economy, although that makes no sense.
I would argue that when a personal corporation buys the sole shareholder goods and services (besides capital that is obviously necessary and solely used for growing the corporation), that counts as a capital gain and should be taxed at that point.
Is a society fair if no one is below the poverty line but there is still a large discrepancy between the richest and the relative poorest?
Goods and services taxes can be at a higher rate on luxury goods. For example, food and gas are HST-exempt – although the rich spend more total on both, they spend a smaller percentage of their income.
The Globe & Mail published a blog post about this.
@Jared:
It’s actually better than that, from a government revenue POV, currently: such expenditures are taxed as shareholder income, more or less*.
* mostly less => bonuses and dividends reduce the amount.
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