Corporations are not people — and it’s people who pay taxes

Posted on September 22, 2015 in Debates – Full Comment
September 21, 2015.   Stephen Gordon

One of the more bizarre exchanges in last Thursday’s leaders’ debate was on what should happen to the small business tax rate. All three parties agree that the rate should be reduced from 11 per cent to nine per cent, but they still managed to find a way to squabble about the proposal.

Even though the Liberals have already signed onto this agenda, the fact that Justin Trudeau has seen fit to qualify his support was enough to produce the unedifying spectacle of the three party leaders bickering about which of them was the most enthusiastic about lowering taxes for small businesses. It was like one of those TV ads for Bud Light: people in violent agreement shouting “Tastes great!” and “Less filling!” at each other.

The leaders were less passionate about the NDP’s plan to increase tax rates for larger corporations; it is likely that neither Trudeau nor Stephen Harper saw any point in spending much energy in attacking it. It’s hard to counter the populist appeal of supporting small business and extracting more tax revenues from large corporations.

Perhaps what is most bizarre is that there is even such a thing as a populist corporate tax agenda. If populism is a cause that champions the interests of the “common people” over the “elites,” then it’s not clear why it should have strong views on corporate tax rates. Why should anyone care about treating small and large corporations differently? After all, corporations aren’t human.

This should be an unobjectionable point, but it doesn’t seem to be. Many people are not only comfortable with anthropomorphizing corporations — that is, attributing to them human characteristics — they are willing to make policy based on the assumption. Others are even willing to offer psychiatric diagnoses and to make earnest documentaries. (I use ‘earnest’ here in the P.J. O’Rourke sense of the word: “stupidity sent to college.”)

The conferral of “legal personhood” does not actually transform corporations into people. Legal personhood is basically a kludge that makes it possible for corporations to (among other things) sign binding contracts and to buy and sell goods, services and assets. It works the other way as well: legal personhood has routinely been denied over the years to any number of people – including women and certain racial, ethnic and cultural groups. For example, the legal right of Canadian women to be considered “persons” in the sense of being eligible for appointment to the Senate was only established in 1929. Being a legal person is not the same as being human, and vice-versa.

Why should anyone care about treating small and large corporations differently? After all, corporations aren’t human.

This distinction matters when it comes to discussing the social welfare effects of a policy. When it comes to the question of who gains and who loses from a certain proposal, economists look at how it affects people, not artificial constructs such as corporations. The question of whether or not a policy measure helps or hurts corporations has no meaningful answer.

Lowering personal income taxes for low earners and raising taxes on high earners makes the tax system more progressive: it increases the welfare of people with low incomes, and makes people with high incomes worse off. But it should be clear by now that performing the same manoeuvre with corporate income taxes is not obviously a progressive policy. Corporations are not human, so it makes no sense to think of small businesses as “poor,” or of large corporations as “rich.” Corporations cannot be wealthy; it’s better to think of them as a form of wealth.

Corporations are owned by people, but making the link between small and large corporations and low- and high-income people is greatly complicated by the fact that corporate ownership can be shared. A person of modest means may hold in her RRSP a few shares of a bank earning billions of dollars a year, while a high-earning professional may own all of the shares in a small business — or perhaps several small businesses — earning a few hundred thousand dollars. To be sure, it’s easy to think of the exact opposite scenario, in which the person of modest means owns her own business and a wealthy executive has an extensive portfolio of shares in large corporations. But without further information about who owns what, there’s little reason to believe that lower small business taxes and higher taxes on large corporations will produce a progressive redistribution of income.

Things get even murkier when you consider the question of who actually pays corporate taxes. The legal incidence of the tax is of course borne by the owners, because they are the ones who are obliged to make the payments to the Receiver-General. But no one is actually obliged to own shares in a Canadian corporation. Investors with access to international capital markets will demand a rate of return that matches the world rate, and higher corporate taxes will simply be passed on to consumers and workers, leaving the after-tax rate of return where it was. Available evidence suggests that most of the burden of higher corporate taxes ends up being borne by workers, in the form of lower wages.

Of course, this story only works for large, widely held corporations. For small businesses, the tax will almost certainly be borne by the owners. But the owners of small businesses are not necessarily people with low incomes, especially if you take into account that small business incomes are net of the (possibly very large) salaries that might paid to their owners in their role as employees. Moreover, recent and emerging evidence suggests that a large fraction of small businesses — or at least, small businesses that generate a large fraction of income in this sector — are in effect instruments used by high-earning professionals to minimize their tax burden. (This was where Trudeau qualified his support for lower small business taxes, and the NDP has since taken the point.)

While we’re on the topic, it’s worth pointing out that there’s little evidence to support the claim that governments should be giving special tax treatment for small businesses in the first place: they generally pay lower salaries, offer worse benefits and weaker employment security, and are less productive than large corporations.

Anthropomorphism is a powerful device for creators of fiction: Watership Down is surely a more gripping read than a monograph on the behaviour of rabbits in the English countryside. But it’s a terrible guide for economic policy-makers. Corporations are not people, and no good can come from pretending that they are.

< >

Tags: , , ,

This entry was posted on Tuesday, September 22nd, 2015 at 11:44 am and is filed under Debates. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

Leave a Reply