Franklin Delano Roosevelt once said that “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.”
This is a good preface to a discussion of corporate taxation, the costs and benefits of which are debated among economists.
A commonly heard criticism of all taxation is that taxes hurt the economy and that, conversely, cutting them will increase economic growth. This is most frequently heard in relation to corporate taxation.
A corporate tax is a levy placed on the profit of a firm, generally operating earnings.
To be fair, from a purely economic point of view, all taxes are ultimately paid by people. So to really assess the effect of a corporate tax we have to tease out who the cost of the tax is passed on to. It is definitely not all borne by the owners of capital because capital itself is mobile and because the burden can be shifted to other places in production – onto other groups involved in production. The other groups we generally really care about are workers, shareholders and consumers. It is possible that lower profits manifest as lower wages, lower dividends and higher prices.
All of these are worth considering and should be part of the considerations, WHEN a corporate tax is imposed.
I say WHEN because I am of the mind that corporate taxes are necessary – largely for the same reason that I accept that personal taxes are necessary.
Ask yourself, why do any of us pay taxes?
We pay taxes so government has the money to pay for the provision of the public goods and services that we benefit from. In the same way that I pay the plumber to install the plumbing for the new shower my family and I will use, I pay the government to pave the highway that my family and I will drive on it.
Now ask yourself, do corporations benefit from the provision of public goods and services? Do they benefit from paved roads? Yes; yes they do.
If they don’t pay taxes, they haven’t paid for the good and services. That certainly meets the definition of a free rider problem. No?
Some on the right side of the political spectrum portray corporate taxes as a way that governments force businesses to subsidize spending on programs. They frame it as if all the benefit goes to some vaguely defined proletariat, and these nasty anti-capitalist socialists are just out to punish the hard working drivers of the economy.
It is not anti-business to expect business to contribute to the upkeep of the community they do business in. Corporate taxes are a way a business pays for government provided good and services they derive direct benefit from.
Roads are a perfect example. It would be hard to get your stuff to market without roads. Or education. Do businesses not benefit from access to a pool of skilled labour? I think they do. How about policing? I am pretty sure that businesses benefit from government maintenance of law and order. And health. Healthy employees are efficient employees and health and safety regulations lend stability to workplaces by providing parameters to how business is conducted that are common across everyone in an industry.
There is a good argument to be made for corporations contributing to the cost of government in the jurisdictions in which they operate.
So, while high taxes may influence where a corporation sets up shop, good infrastructure will also influence that decision.
As for cost shifting, there are constraints on how much a corporation can shift the burden of taxation on the two really vulnerable groups – consumers and workers.
Like capital, skilled labour is relatively mobile. I am sure you’ve noticed the number of eastern Canadians working in Alberta. The skilled labour followed the higher paying jobs. So, while lower wages and employment can increase profit, there is a point at which they will drive away skilled labour and decrease the efficiency of production.
For the same reason that high taxes can drive away capital, high prices can lower sales. Businesses will only pay so much, but the same can be said for consumers – albeit the elasticity of prices varies quite a bit from product to product. Businesses cannot foist the entire cost of taxation onto the consumer without eventually chipping away at their own bottom line.
Obviously there is a point at which corporate taxation will harm the economy, but I definitely believe there is also a lot more inelasticity in corporate taxation than our government is making it out to seem.
In Alberta, and specifically in the oil and gas industry, there is a fair amount of inherent inelasticity. First, the oil sands are physically located here and they have significant infrastructure investments in Alberta so taxing the corporations involved in that industry won’t immediately make them pull up stakes and leave their primary input behind. They need to be here to get the oil.
I don’t feel like Alberta has settled at the spot on the curve where there is a balance. I don’t think we have reached the place where the dues paid by corporations cover the cost the organisation that our government is capable of, and should be, providing. If we had achieved balance we wouldn’t suffer as much from this boom and bust cycle that plagues us. If we all paid our share we would have a little extra to get us through the lean times. That would be balance. We have to provide basics when times are good AND when times are bad. We don’t have a spending problem. We have a revenue problem. We have a government enabled corporate free-rider problem.