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.
Corporate taxes are taxes on net profit. Aren’t profit-generating investments deducted from profits before taxes are paid? Make $100 million in profits, plow that $100 million into factory improvements, pay no tax.
Given which, increased corporate tax rates should actually encourage capital investment. With higher corporate taxes, capital investment becomes a form of tax shelter. Incentives push more towards longer term growth and less towards immediate profit-skimming.
No doubt it would encourage corporate tax avoidance. But by all accounts they don’t need much encouragement; really, how much harder could they work at that stuff? Just close loopholes and hire more corporate enforcers at CRA (rather than laying them off as the Harper government does). Heh, maybe make the fees and salaries of tax lawyers not count against profits like normal payroll does.
Make $100 million in profits, plow that $100 million into factory improvements, pay no tax.
Itâ€™s not quite that simple. The company writes off the capital investment as it depreciates over time. If the tax write-off is faster than actual economic depreciation, then a higher tax rate could encourage investment.
Any sense of what the NDP would do to dividend level taxation if they were to increase corporate tax rates?
One of the Tories’ less noticed tax changes over the last few years (and certainly in the last budget) is that they have been steadily increasing the effective tax rate on corporate dividends paid by Canadian corporations (by reducing the dividend tax credit) to maintain a more or less constant integrated tax rate on corporate income. This is good tax policy (i.e., a dollar of income should be taxed at the same rate regardless of whether its earned through a corporation or directly) but, for obvious reasons, they haven’t been marketing it to their supporters (nor, I note, have the NDP or Liberals been loudly condemning them on the point).
Now, obviously, that doesn’t fully offset the loss in corporate tax revenue (if any) arising from corporate tax cuts, since many dividends will be paid to non-taxable entities (such as pension plans or RRSPs) that can’t claim the dividend tax credit. Still, many of those dividends will be taxed at a new, higher, rate, offsetting (at least in part) any reduction in corporate tax revenue.
Conversely, though, if the NDP were to increase corporate tax rates and adjust the dividend tax credit entitlement accordingly, the foregone dividend tax revenue would offset (at least in part) any increase in corporate tax revenue.
This isn’t quite the same issue as the dynamic effects mentioned in your post (supposed, really?), but it’s a real one. Too often in the past NDP policy has looked solely at one level of taxation without taxing into account the implications at other levels. For example, Bryan Topp’s proposal to end the favourable tax treatment for stock options for employees didn’t take into account the fact that stock options are generally not deductible for employers. The net effect is that whatever the fisc. loses on the exercise of stock options, it makes up with higher corporate tax revenue arising from the non-deductibility of employee stock options. Of course, one can still argue in favour of ending the favourable treatment of stock options, so long as you accept that it won’t bring in an extra dime of revenue.
Of course, the NDP could decide that it wants to increase the integrated tax rate on corporate income (although we saw what happened the last time we did that – that was part of what drove the formation of income trusts). Then again, if it were to do that, it could probably abandon any claim it might have to implementing sensible tax policy.
“If the tax write-off is faster than actual economic depreciation, then a higher tax rate could encourage investment.”
Speaking of sensible tax policy, good lord, tell me you’re kidding? Faster depreciation encourages investment, not higher tax rates. After all, depreciation is deductible against revenue. True, higher tax rates mean the value of the deduction is higher (so, yeah, all else being equal would encourage investment) but since they also mean that the potential liability on the revenue (i.e., tax) is correspondingly higher as well (i.e., all else isn’t equal), higher rate shouldn’t generally change the incentives associated with accelerated depreciation. If investment decisions are based on after-tax returns, the latter effect is going to dominate the former (unless you’re suggesting that companies invest with the expectation of losing money, at least for tax purposes, in which case corporate income tax won’t generate any income).
Good point regarding the dividend tax credit. The tax expenditure estimates indicate that the gross-up and credit cost $4.2 billion in 2012, about 13% of total corporate tax revenues ($33 billion).
If we assume that the NDP would increase the tax credit for eligible dividends in proportion to the general rate, that would reduce the net revenue from a point of corporate tax to between $1.4 billion and $1.5 billion.