Corporate Tax Incidence and Social Democracy
Over at Worthwhile Canadian Initiative, Stephen Gordon critiques the last federal NDP platformâ€™s reference to â€œCanadaâ€™s wealthiest corporationsâ€ on the grounds that people, not corporations, own things.
But as Declan points out in several pithy comments on Stephenâ€™s post, corporations clearly can and do own things. The corporations that own the most valuable things in Canada can quite reasonably be described as â€œCanadaâ€™s wealthiest corporations.â€
On the semantic point, I agree with Stephen for a different reason. In a debate about the corporate income tax (CIT), I would instead refer to â€œprofitable corporationsâ€ because the tax applies to the flow of profits rather than toÂ the stock of wealth. (References to â€œwealthy corporationsâ€ would be more appropriate in a debate about a corporate capital tax.)
However, there is a more substantive difference of views. The federal NDP sees large corporations as powerful economicÂ institutions with significant latitude to make important decisions. Individual shareholders have very little control over them. Corporations retain substantial profits in excess of real investments or distributions to shareholders.
Stephen sees corporations as a legal convenience through which individuals own things and conduct business. In his debate with Declan, Stephen describes corporations as safes in which households store some of their wealth. The corporate form is of little economic relevance.
It seems to me that there are many different types of corporations. For the local paving company or auto repair shop, Stephenâ€™s view is probably about right. For Suncor or the Royal Bank, the NDPâ€™s interpretation stands.
However, even if one completely accepts Stephenâ€™s view, there are still compelling arguments for the CIT. As I noted regarding the CIT for â€œsmall businessâ€ and as a couple of commentators noted on Stephenâ€™s post, it is a problem if (wealthy) individuals can indefinitely delay paying personal tax on income by keeping it inside a corporation. By comparison, if I decide to keep my income locked away in a safe, I still pay tax when I earn it.
Stephen offers no solution to this problem. The obvious solution is to tax corporate profits at the same rate as personal income, but also give individual shareholders a tax credit equal to the CIT rate if and when they collect dividends subject to personal income tax. That was more or less the system Canada had until 2000, when the federal government started slashing its CIT rate way below its top personal income tax rate.
Stephenâ€™s concern, succinctly expressed by his post title, is that corporations may be able to shift the tax burden. The CIT may be borne not by (wealthy) shareholders, but by (less affluent) workers and/or consumers.
Even so, it is unclear whyÂ he supports cutting the CIT. He advocates a higher GST even though it would mostly be borne by wage-earning households. Yet he opposes the CIT because he thinks that it would mostly be borne by wage-earning households.
Of course, the CITâ€™s economic incidence is an important question. It has inspired much scholarship with few definitive conclusions.
Stephen typically asserts that this question has been settled beyond a shadow of a doubt. However, it is worth noting that the Australian op-ed he approvingly cites concedes that â€œthe evidence is thinâ€ on how the CIT might affect consumer prices and claims only that â€œthe empirical evidence is strongerâ€ on how the CIT might affect workersâ€™ wages.
A critical point is that other taxes can also be shifted. Consumption taxes are likely to be divided between the buyers and sellers of consumer goods. As Stephen notes elsewhere, rich people may be able to shift the burden of personal taxes for high incomes onto other segments of society.
In a world where the market provides a perfect transmission mechanism, the statutory incidence of taxes is ultimately irrelevant. The economic burden of all taxes will be distributed according to various elasticities of supply and demand.
In such a world, it does not really matter which taxes the state uses to collect revenue. If so, the debate about the CIT is essentially just a debate about more or less government revenue. The social democratic goal would be to raise more revenue,Â using the CIT and/or other taxes, for redistribution through progressive public expenditures.
Of course, in the real world, market mechanisms are far from perfect. Corporations may be able to shift some CIT, but much of it will come out of after-tax profits. To the extent that the CIT is borne by shareholders, it is a highly progressive tax.
Because a large fraction of Canadaâ€™s corporate sector is owned by foreign investors, the CIT is an especially good tax for Canada. To quote a 2004 Finance Canada study, cutting the CIT is â€œa less cost-effective way to improve well-beingâ€ because â€œsome of the CIT cut will accrue to foreigners, who own a substantial portion of the Canadian capital stock.â€
As I have argued elsewhere, some of that foreign portion will actually accrue to the U.S. treasury, which taxes American corporations on a worldwide basis. The extent of foreign ownership is a key difference between Canada and the Nordic states thatÂ bears critically on the CITâ€™s desirability.
If we assume limited tax shifting, then the CIT is preferable to other taxes in important ways. If we assume unlimited tax shifting, then the CIT is essentially the same as other taxes. Either way, Canadian social democrats should support a higher CIT.