Backgrounder: Focus on corporate tax rate, not small businesses

Oliver Wendell Holmes Jr. famously said: “Taxes are the price we pay for a civilized society.”

 

On July 18, 2017, the Liberal government introduced drastic policy changes to the tax laws of Canada. While claiming that the changes are small, designed to make the system more “fair” and close alleged loopholes, in actuality the proposed changes will primarily impact small to medium sized family businesses, rather than the pre-election promise to aim any changes at large corporations and the wealthiest Canadians. Where the last major changes to tax policies took many years of consultations, these proposals are being rushed through in 75 days, with a deadline of October 2 for feedback.

 

The problem with this legislation is that it casts too wide a net. The Liberals promised to eliminate loopholes and unfair tax procedures for large corporations, but they are not delivering. The consultation period is far too short for changes of this magnitude. There should be a Royal Commission or similar high-level review body to do adequate, widespread consultation. Middle-class and young entrepreneurs are unintentionally and seriously impacted by these tax changes – the same groups Trudeau promised would be a priority. Instead, the options for many will be to either close their doors, or sell to foreign investors, mostly from the U.S.

 

Tax compliance costs will increase for small and family businesses. The only job creation is likely to be for tax accountants and tax lawyers. The Liberals’ proposals would also impact the retirement plans for most family businesses. The ability and willingness of small businesses to invest in their own or spin-off businesses will be greatly reduced. This will result in less, not more, investment in fledgling companies, the very same 97.9% of companies that have created the vast majority of new jobs for many decades.

 

From GPC Vision Green:

“Taxation should be fair, efficient, and effective. Today these fundamental principles are being distorted. The Green Party believes in living within our limits, ecologically and fiscally. We are committed to realistic, balanced, thoughtful action that will balance the budget and reduce the national debt.” 

Country

National Large Corporate Tax Rate

Canada

15%

USA

35%

China

25%

Japan

24%

New Zealand

28%

Norway

24%

 

In the 1960s and 1970s, the federal government's corporate income tax rate was 37 per cent. In 1980, it was reduced to 36 per cent. In the 1980s, the Mulroney Conservative government reduced the corporate tax rate by eight percentage points. Due to a huge deficit and a drastic increase in the national debt, the corporate tax rate was maintained at 28 per cent in the 1990s. From 2000 to 2004, it dropped from 27 per cent to 21 per cent. Then Liberal Finance Minister, Paul Martin, drastically cut the corporate income tax by six percentage points in three years. Then the Conservatives returned in 2006. Two years later, the global recession did not stop the Harper Conservatives from further lowering corporate income tax, from 21 per cent to 15 per cent.

 

From nearly 40 per cent in the 1970s to the current 15 per cent, these corporate tax cuts have been excessive. The federal personal income tax for top earners is 29 per cent – almost double the corporate income tax rate. Forty years ago, the share of personal income tax revenue in the federal government's total revenue was 30 per cent; it was almost 50 per cent in 2013. But the share of corporate income tax has dropped from 20 per cent to 13.6 per cent today. It should be obvious that the Liberals and Conservatives have shifted the corporate tax burden to people.

 

In 2013/14, the federal government collected $34.6 billion in corporate income tax. If our rate were 30 per cent (still 5 per cent lower than the U.S.), the federal coffer would have collected an additional $30 billion. This is money that could be used on health care, child care, senior care, veteran support, advance education, job training, retirement, environment, social housing, infrastructure, and the list goes on.

In 2015, both the Conservatives and Liberals refused to increase corporate income tax. It’s little wonder people have said voting for the Liberals is the same as voting for the Conservatives.

From GPC Vision Green: Corporate Taxes:

The Green Party supports raising corporate taxes over four years from the current level of 15% back to the level set in 2009 – 19%. We are well aware of the familiar argument that higher corporate taxes are inevitably passed on to consumers via increased prices for goods and services.  However, in light of the evidence of hoards of cash accumulated by corporations after the financial crash of 2008, then used too often for mergers or to buy back shares which benefitted executive bonuses rather than being spent on employment and increasing productivity, this rings hollow. Raising the corporate tax rate to 19% would still leave some $595 billion in corporate coffers. (It is estimated that each percentage point increase in the federal corporate tax rate raises $1.5 billion in revenue.)

 

We also believe that Canada’s small businesses deserve fiscal incentive to growth and development. The Green Party supports the proposal in Budget 2015 to reduce the federal small business tax rate to 9% by 2019. In addition, the Green Party supports a longer term review of the structure of corporate taxes, not just the tax rate. Some European countries have successfully implemented a reform that changes the Corporate Income Tax (CIT) into a “rent” tax, so that the tax cannot be said to act as a disincentive to investment and innovation. Among other things, this Allowance for Corporate Equity tax (ACE) enables firms to deduct the cost of borrowing and equity for their own investment.

 

New sources of revenue: The Green Party supports closing loopholes on offshore tax havens estimated to be sheltering at least $12 billion from Canadian tax authorities. In addition, the Greens also support introducing an estate tax on estates worth more than $5 million. This would yield $1.5 billion a year in additional revenues. Canada should join like-minded nations in Europe such as France and Germany in promoting and implementing an international financial transactions tax (popularly known as the “Tobin tax”). This is a very tiny tax rate per transaction, but it yields substantial revenues due the volume of financial transactions.