Profits – and people

TheGlobeandMail.com – news
Apr. 11, 2011.   Don McIver, National Post

In the past decade, both Liberal and Conservative federal governments have sharply cut corporate income tax rates. Canada is currently still committed to reducing the federal rate by a further 1.5 points, to 15%. The provinces have taken action as well: Manitoba has completely eliminated taxes on small businesses, while British Colombia has announced that it will follow suit next year. Yet the debate over further reductions has become a centerpiece of the current federal election campaign.

Opponents of corporate tax cuts base their arguments on a biased view of corporate decision making. Politicians and social activists claim that we must choose between “profits or people.” That view fails to appreciate that companies make decisions in the same way as their very “human” analogues: individual entrepreneurs. Every shift in the balance of risk and reward subtly changes the investment climate that shapes economic activity.

How would the owner of a local convenience store respond to a sudden reduction in property taxes? She most likely would not immediately increase employee hours, but might reduce prices on certain items to attract new clientele. He might decide to spend money on a family vacation overseas, repave the shop parking lot, or sock additional profits away to finance expansion into the space next door. These very human responses have obvious economic consequences, even on a small scale.

Corporations respond in precisely the same manner. Lower taxes may trigger price reductions if management is anxious to improve competitiveness. If a business boosts dividends, individual and institutional shareholders will experience increased cash flow. Companies could end up “spending” tax savings on acquisitions (possibly abroad-just like our convenience store owner’s foreign holiday) but they would do so on the expectation of improved future earnings, flowing back to Canada.

Will reduced corporate taxes result in an immediate increase in investment and jobs? No. When markets are stressed, corporations are not likely to rush into new investments, expand output and hire new employees. But when market opportunities present themselves, lower taxes will spark employment gains -if not immediately, certainly over the longer term.

Important as tax levels are, they remain a relatively minor component of the investment equation. But there is no doubt that a favourable tax environment constitutes a crucial advantage for Canadian business. Rather than attempt to reverse the move towards lower taxation, good policy recommends further reductions-and even the elimination of corporate income taxes entirely.

Politicians who pit the interests of the public against supposedly faceless corporate entities perform a great disservice. Collectively we are all components of the economy-whether as employees, consumers or producers. We all directly or indirectly depend on a profitable private sector. Our private and public pension plans rely heavily on dividend and capital gains incomes generated by corporations and banks. Solid returns on our savings and insurance plans are only possible so long as the corporate sector remains strong. Finally, one of the largest labour pools in the country is employed in the financial sector itself, spending millions of dollars in the local economy, and paying millions more in income taxes.

It is time to give low-tax policies their due, and stop trying to bite the hand that feeds us. In the words of former Prime Minister Paul Martin “Do you want to tie Canada’s hands behind its back? Then increase corporate income taxes.”

– Don McIver is director of research at the Atlantic Institute for Market Studies, an independent economic and social policy think-tank based in Halifax.

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