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The Problem of Corporate Tax Rate Hikes

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49 seconds ago

7 minute read

David Clinton

 

Why it’s nearly impossible to avoid causing more harm than good

Are Canadian corporations paying their share? Well, what is their share? And before we go there, just how much are Canadian corporations paying?

According to Statistics Canada, in the second quarter of 2024 the federal government received $221 billion from all income tax revenues (excluding CPP and QPP). Provincial governments took in another $104 billion, and local (municipal) governments got $21 billion. Using those numbers, we can (loosely) estimate that all levels of government raise somewhere around $1.38 trillion annually.

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If you’re curious (and I know you are), that means taxes cost each man, woman, and child in Canada $33,782 each year. Trust me: I feel your pain.

Based on Statistics Canada data from 2022 (the latest comparable data available), we can also say that roughly ten percent of those total revenues come from corporate taxes at both the federal and provincial levels.

Keep that 10:90 corporate-to-personal tax revenue ratio in mind. Because what if raising the corporate tax rate by, say, five percent ends up driving businesses to lay off even one percent of workers? Sure, you’ll take in an extra $7 billion in corporate taxes, but you might well lose the $12 billion in personal income taxes those laid-off workers would have paid.

How Much Should Corporations Pay?

Ok. So how should we calculate a business’s fair share? Arguably, a single dollar’s worth of business activity is actually taxed over and over again:

  • When a corporation earns revenue, it’s taxed on its profits.
  • Any remaining profit may be distributed to shareholders in the form of dividends. Shareholders, of course, will pay income tax on those dividends.
  • Corporations pass on part of the tax burden to consumers through higher prices. When consumers pay those higher prices, a part of every dollar they spend is indirectly taxed through the corporation’s price adjustments.
  • Employee wages paid from after-tax corporate profits are taxed yet again.
  • Shareholders may eventually realize capital gains when they sell their shares. These gains are, naturally, also taxed.

I guess the ideal system would identify a corporate tax rate that takes all those layers into account to ensure that no single individual’s labor and contribution should carry an unreasonable burden. I’ll leave figuring out how to build such a system to smart people.

Does “Soaking Rich Corporations” Actually Work?

Do higher corporate taxes actually improve the lives of Canadians? Spoiler alert: it’s complicated.

Government policy choices generally come with consequences. From time to time, those will include actual solutions for serious problems. But they usually leave their mark in places of which lawmakers were initially barely aware existed.

Here’s where we get to explore some of those unintended consequences by comparing economic performance between provinces with varying corporate tax rates. Do higher rates discourage business investment leading to lower employment, economic activity, and incoming tax revenues? In other words, do tax rate increases always make financial sense?

To answer those questions, I compared each province’s large business tax rate with four economic measures:

Using four measures rather than just one or two gives us many more data points which reduces the likelihood that we’re looking at random statistical relationships. Here are the current provincial corporate tax rates for large businesses:

If we find a significant negative correlation between, say, higher tax rates and outcomes for all four of those measures, then we’d have evidence that higher rates are likely to have a negative impact on the economy (and on the human beings who live within that economy). If, on the other hand, there’s a positive correlation, then it’s possible higher taxes are not harmful.

When I ran the numbers, I found that the GDP per capita has a strong negative correlation with higher tax rates (meaning, the higher the tax rate, the lower the GDP). GFCF per capita and the private sector employment rate both had moderately negative correlations with higher taxes, and my own composite economic index had a weak negative correlation. Those results, taken together, strongly suggest that higher corporate tax rates are indeed harmful for a province’s overall economic health.

Here’s a scatter plot that illustrates the relationship between tax rates and the combined outcome scores:

Alberta, with the lowest tax rate also has the best outcomes. PEI, along with New Brunswick and Nova Scotia, share the high-tax-poor-outcome corner.

I guess the bottom line coming out of all this is that the “rich corporations aren’t paying their share” claim isn’t at all simple. To be taken seriously, you’d need to account for:

  • The true second-order costs that higher corporate taxes can impose on consumers, investors, and workers.
  • The strong possibility that higher corporate taxes might cause more harm to economies than they’re worth.
  • The strong possibility that extra revenues might just end up being dumped into the general pool of toxic government waste.

Or, in other words, smart policy choices require good data.

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Taxpayers Federation joins constitutional court fight regarding equalization expansion

Published on October 6, 2024

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From the Canadian Taxpayers Federation

Author: Carson Binda 

“Provincial governments want the courts to force Ottawa to give them even more money through the equalization program”

The Canadian Taxpayers Federation is joining the fight against Newfoundland and Labradors’ legal bid to increase federal equalization payments.

“Provincial governments want the courts to force Ottawa to give them even more money through the equalization program and taxpayers simply can’t afford to pay those bills,” said Carson Binda, B.C. Director for the CTF. “Taxpayers in so-called have provinces lose billions through the equalization program, but the payments don’t provide any long-term solutions in recipient provinces.

“The Canadian Taxpayers Federation is getting into this court fight to stop provinces from wasting even more taxpayers’ money on the equalization program.”

The Newfoundland and Labrador government is suing the federal government for more equalization money. Premier Andrew Furey is arguing a province should receive more tax dollars when it can’t afford to pay for new programs that other provinces implement.

“Taxpayers in the rest of Canada shouldn’t be on the hook for whatever new spending provincial politicians want to roll out,” Binda said. “Equalization already costs $25 billion a year – how much would the bill go up if Furey gets his way?”

The CTF filed an application to intervene in the Newfoundland and Labrador Supreme Court on Oct. 3, 2024. The CTF will argue that the Constitution does not give provinces standing to sue Ottawa for bigger equalization payments.

“Canada’s Constitution was never designed to grant provincial governments the authority to forcibly extract more tax dollars from taxpayers in other provinces,” said Devin Drover, CTF General Counsel and Atlantic Director. “We look forward to representing taxpayers in the court in this groundbreaking case.”

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Business

‘Serious Problem’: America’s Cutting Edge Weaponry Is Dependent On Chinese Tech, Experts Warn

Published on October 5, 2024

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From the Daily Caller News Foundation 

 

By Jake Smith

American defense startups are far too reliant on Chinese parts — and that poses a serious risk of exploitation by Beijing, experts told the Daily Caller News Foundation.

Business is booming as hundreds of defense startups have joined the growing U.S. military-industrial complex since 2021, according to The Wall Street Journal. But defense contractors are heavily dependent on China for parts for weapons systems, including motors, chips and rare earth minerals, which poses potential avenues for Beijing to exploit or hamper American technologies, experts told the DCNF.

“This is a serious problem for two reasons,” John Lee, senior defense expert at the Hudson Institute, told the DCNF. “First, as we saw during the pandemic, over-reliance on Chinese supply chains for components and inputs leaves countries and economies vulnerable to politically or policy-motivated restrictions being imposed by Beijing.”

“Second, components can have elements inserted into them without the knowledge of the end user. This could be spying equipment, channels for China to disable or damage the component from a distance, or even materials that can weaponize the component,” Lee said.

New defense contractors particularly rely on these parts because they don’t enjoy the same cash reserve that the industry giants do, and China makes and sells the parts for a cheaper price.

But these startups don’t want to be so reliant on China, given that the country is actively trying to undermine the U.S. and would likely be an adversary in a global war scenario, industry executives told the WSJ.

Decoupling from China-based entities proves difficult and expensive, defense startups told the WSJ, though it’s the only option in the long term.

“There’s a lot of lip-flapping about national security resilience manufacturing. But there’s no money for us to do this,” Scott Cololismo, CEO of defense startup LAND Energy, told the WSJ. LAND has some funding grants from the Pentagon, but needs more support to thrive, Colosimo explained.

The rare-earth minerals that China provides U.S. defense contractors — including neodymium, yttrium and samarium — are of particular value, given that they are essential for most high-tech military equipment, including laser and missile systems, jet engines, communications devices and even nuclear propulsion systems.

“Critical minerals are the building blocks for many of the most sensitive products in our defense industry,” Adam Savit, director of the China Policy Initiative at the America First Policy Initiative, told the DCNF. “China can abuse its dominant position in other critical mineral supply chains at any time.”

“The only long-term solution to this is to enact comprehensive permitting reform to approve domestic mining projects, and work with allied nations to develop new production when the U.S. lacks the relevant natural resources,” Savit said.

Savit’s warning that China can upset the supply chain of rare earth minerals also invokes a broader problem — China can cut the supply line for any of the parts needed by U.S. defense contractors, for any time or reason it chooses.

“If your supply chain runs dry, you have nothing to sell,” Ryan Beall, founder of drone manufacturer TILT Autonomy, told the WSJ.

Lee warned that the problem exposes the U.S. and West’s gaps in domestic supply chain capabilities for their respective defense industrial bases, which creates a vacuum that other actors like China find ways to exploit.

China supplies over 90% of the magnets used in motors for ships, missiles, satellites and drones, according to the WSJ. Republican Reps. Elise Stefanik and Rob Wittman sent a letter to an Air Force official last week and called the reliance on China “a serious national security threat,” pointing to an example in a report last year that found the Air Force increased its dependence on China for parts by 69%.

The idea to stop relying on China for resources became more popular after the COVID-19 pandemic, which created massive supply chain shortages in various sectors, including healthcare products. But in the defense capacity, it will take years to produce parts domestically, according to the WSJ.

“There has been a hollowing out of manufacturing and industrial capabilities in the West which provides China with an enormous advantage,” Lee told the DCNF. “In the event of a crisis against a country such as China, this will become very dangerous for the U.S. and its allies.”

Unable to wait for domestic capabilities to improve and increasingly wary of buying from China, new defense contractors are turning to other alternatives for parts, according to the WSJ. Sourcing components from Mexico and Southeast Asia, utilizing 3-D printing and buying parts in bulk have been some of the creative ways contractors are solving the problem.

Industry experts also expect that the U.S. government is likely to restrict some Chinese parts used by contractors in a bid to move toward domestic capabilities, according to the WSJ. Some restrictions on items used to produce cameras and radios already exist.

“If the government wants a U.S. supply chain, that’s fine, but they need to be clear about their requirements, and they need to pay for it,” Beall told the WSJ.

Featured Image: U.S. Navy photo by Mass Communication Specialist 2nd Class Aaron Lau

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