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The Progressive Economics Forum

BC to Raise Corporate Taxes

Amazingly, BC’s government has joined its official opposition in proposing to restore the provincial corporate income tax rate from 10% to 12%.

The same government that cut from 12% to 10% would now reverse itself as part of a last-ditch effort to save the HST. Revenue from a higher corporate tax rate would help finance a lower HST rate.

According to BC’s finance minister, “It is clear that business is a major beneficiary of the HST and an honest rebalancing is viewed by the public as appropriate and reasonable.”

A key argument for the HST, which removes sales tax from business inputs, has always been that business should be taxed not on its inputs but on its profits. I have long noted that an honest effort to put this principle into practice would combine the removal of sales tax from business inputs with higher corporate taxes on business profits.

However, the federal Conservative government called for all provinces to both adopt the HST and cut their corporate tax rates to 10%. The provincial governments of Ontario and BC followed these marching orders. The apparent goal was to make the largest possible fiscal transfer to the corporate sector.

Now that BC’s opposition has successfully pushed back on the HST, the government is starting to follow the logic of its own argument, promising to combine the HST with a corporate tax increase. However, the reversal of BC’s corporate tax cuts would not collect enough revenue to fully offset the removal of sales tax from business inputs.

Nevertheless, this development seems to improve the chances of BC restoring its corporate tax rate to a more appropriate level. More broadly, it weakens the narrative that corporate taxes must always and everywhere decline. The business lobby’s acceptance of the government’s plan undermines its usual claims that raising corporate taxes would be unimaginably horrible.

UPDATE (May 28): Greg and Seth have more.

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Comments

Comment from duncan cameron
Time: May 26, 2011, 10:58 am

Speaking to CUPE, Ontario NDP leader Andrea Horwath called for the corporate tax rate to be restored to 14 percent.
In his successful B.C. NDP leadership campaign Adrien Dix was the first political figure in Canada to call for an increase in corporate taxes. It seems in B.C. at least, the leader of the official opposition is setting markers for policy development. The new premier is trying to take an advantage away from the opposition by borrowing a policy idea.
In fact, generally, opposition parties do have scope to influence the government in a parliamentary setting. Exceptions, those with tin ears, such as the Mulroney Conservatives after their 1988 victory, often get punished at the polls. We shall see if Harper listens to the NDP.

Comment from Erin Weir
Time: May 27, 2011, 3:15 am

Dix deserves significant credit for effectively pressing this issue, but it is debatable whether he was the first political figure in Canada to do so. The 2008 federal NDP platform’s centerpiece was restoring the federal corporate tax rate to 22% from 19.5%.

However, an attempt was made to present this policy as maintaining the 2007 rate rather than increasing the 2008 rate. Similarly, the federal Liberals announced their 18% policy in 2010, when it would simply have maintained the current rate.

In terms of political communications, Dix may have been the first to unequivocally call for increasing (rather than just maintaining) corporate taxes. The federal NDP clearly did so a couple of months later by proposing 19.5% in the recent election.

Anyway, the important thing is that raising corporate taxes is becoming politically acceptable. What a change from a few years ago, when only wild-eyed trade unionists were saying such things.

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