Since the global financial crisis in 2008, much of the Western world has been struggling to recover. Even in the nations that have performed relatively well, growth is not as robust and people are insecure about their financial futures. One solution to increase incomes and living standards is to abolish the corporate income tax.
A tax requires that someone’s wallet gets lighter. No matter how wealthy and profitable corporations may be, they don’t bear the burden of the taxes. They may sign the cheque, but they are a mere legal entity, not a person. The burden of the corporate income tax falls instead on those to who have a stake in the corporation—workers and shareholders.
In theory, the burden is split between consumers (who end up with higher prices), the workers (who get lower wages), and the shareholders (who end up with lower returns).
This is not because the company or the shareholders actively conspire to lower the wages of workers. It’s actually due to the natural rate of return to capital, or the average risk-adjusted rate.
Averaged over the economy, a person who invests $100 of capital might get a $10 year return. So when the state introduces a tax on profits, it cuts that return. A 50 per cent tax means that the investor would only get a $5 a year return on the $100. If everything just happened in one country and capital had nowhere else to go, then shareholders would carry the burden of corporate tax.
But with an international economy, the international average return needs to be considered. The theoretical investor could take $100 out in Canada and receive a higher return in a jurisdiction with a lower corporate rate.
Thus, where capital is mobile, taxing the returns to capital leads to less capital being invested. Additionally, average wages of workers are largely a function of productivity and, to a large extent, the average productivity of labor is determined by how much capital is added to that labor.
Therefore, in a global economy, the corporate income tax will lead to less capital investment, lower productivity, and thus, lower wages. Lower wages are simply a product of the tax wedge—or lower returns—that reduce investments created by the corporate income tax.
A review of consensus economic literature by Ben Southwood of the Adam Smith Institute, a London-based free market think tank, suggests that in open economies—such as Canada’s—workers could bear up to 57.6 per cent of the corporate income tax.
Corporate taxes are also some of the most economically damaging taxes the state can impose. The economic impact of a tax is a deadweight loss, or a loss in output caused by a tax relative to each dollar of revenue raised. However, the deadweight loss of tax varies substantially depending on the type of tax that is utilized to raise revenue. Taxes on property have the lowest deadweight loss per dollar raised in revenue. Consumption taxes have a bit more, income taxes are somewhat higher, while capital and corporate taxes impose the greatest loss in output per dollar raised in revenue.
The effects of abolishing the corporate tax as hypothesized by some economists are impressive. As an example, using a model developed at the Tax Analysis Center, Boston University economist Laurence J. Kotlikoff estimated that if the United States were to repeal the corporate tax, the Gross Domestic Product would increase by eight per cent and the wages of skilled and unskilled workers would rise by up to 12 per cent.
Even progressives should support the elimination of the corporate tax. Its abolition would eliminate the double taxation of corporate profits and thus allow for the full taxation of capital gains and dividends as regular income, thus resulting in a more equitable tax scheme than what currently exists.
In the face of all the recent economic uncertainty, Canada should abolish this punitive, and in many ways regressive, levy. It does none of the good many of its proponents suggest; instead, it inhibits the living standards of the workers it claims to speak for.