Whatâ€™s a Point of Corporate Tax Worth?
Tom Mulcairâ€™s recently reiterated unwillingness to raise personal tax rates puts the spotlight on corporate taxes. But how much revenue is at stake?
Three and a half years ago, I posted a fiscal breakdown of Harperâ€™s corporate tax cuts and how much revenue could be retained by stopping or reversing them. These figures, based on Budget 2009 projections, suggested that a point of general corporate tax would be worth between $1.9 billion and $2 billion today.
Budget 2009 envisioned a sharp, V-shaped recovery balancing the federal books in the current fiscal year (2013-14). Obviously, the economy, corporate profits and tax revenues have proven less buoyant than forecast.
The Parliamentary Budget Officer (PBO) has since started estimating the value of corporate tax points. For the 2013 calendar year, it reckons that a point of the general rate is $1.3 billion and that a point of the â€œsmall businessâ€ rate is $770 million.
But those estimates are based on last Octoberâ€™s gloomy PBO fiscal update, which had projected corporate tax revenues of below $29 billion this year. Indeed, multiplying the PBOâ€™s tax-point estimates by the relevant tax rates yields $28 billion (i.e. 15*$1.3 billion + 11*$770 million).
Since then, corporate profits have picked up (while the job market has slowed down). Aprilâ€™s PBO fiscal outlook projects corporate tax revenues of about $33 billion this year. Budget 2013 projectsÂ about $34 billion. (I averaged fiscal years to approximate the 2013 calendar year.)
How those revenue figures translate into tax points depends on how much is collected by the general rate versus the â€œsmall businessâ€ rate. Tax expenditure estimates provide a couple of clues.
Finance Canada estimates that the â€œlow tax rate for small businessesâ€ cost $2.9 billion of lost federal revenue in 2012. Since the â€œsmall businessâ€ rate is four points lower, this estimate implies that each point is worth $734 million (i.e. $2,935 million/4). In that light, the PBOâ€™s estimate of $770 million for 2013 looks reasonable.
The second clue from tax expenditures is that the corporate tax point Ottawa transferred to the provinces back in 1977 is now worth an estimated $2.5 billion. That is effectively a point of the general rate plus a point of the â€œsmall businessâ€ rate. Subtracting the â€œsmall businessâ€ point implies that a general corporate tax point is worth $1.7 billion (i.e. $2,480 million – $770 million = $1,710 million).
Multiplying these point estimates by the relevant tax rates yields $34 billion (i.e. 15*$1.7 billion + 11*$770 million). That lines up with Finance Canadaâ€™s projection of corporate tax revenue for this year.
If one prefers the PBOâ€™s slightly lower revenue outlook, one might edge the general estimate down to $1.6 billion per point. Either figure essentially splits the difference between the overly optimistic projection from Budget 2009 and the overly pessimistic projection from the PBOâ€™s 2012 fiscal update.
Fully reversing Harperâ€™s corporate tax cuts to restore a general rate of 22% would increase annual revenues by $11 billion or $12 billion (i.e. 7*$1.6 or 1.7 billion). Implementing a 19.5% general rate, as proposed by the last federal NDP platform, would recoup between $7 billion and $8 billion (i.e. 4.5*$1.6 or 1.7 billion).
Of course, all of the above figures are static estimates based on a given (2013) level of corporate profits. Unless there is another economic crisis, profits and the corresponding value of corporate tax points will be higher by the 2015 federal election.
On the other hand, raising corporate tax rates arguably could reduce taxable corporate profits by discouraging profit-generating investments and/or by encouraging corporate tax avoidance. The significance of these supposed dynamic effects is hotly contested. But we should at least get our static estimates right before delving into that debate.