Small companies the main casualties of higher corporate taxes

Posted on in Debates

TheGlobeandMail.com –
Apr. 24 2015.   Todd Hirsch

In the world of public finances, political land mines can blow up in a politician’s face. High on the list of topics to avoid is corporate income taxes. The right wingers hate them and the left wingers love them. No matter what you do with corporate taxes, you’re sure to infuriate someone.

But as with most topics in economics, raising taxes on corporations cannot be boiled down into a simple left versus right debate. It’s more complicated than that.

The right wingers rant that corporate income taxes siphon off precious business profits, which will force companies to lay off workers. Conversely, they believe that cutting corporate taxes will stimulate hiring, but the evidence of that is sketchy.

The left wingers, on the other hand, are enthusiastic about raising corporate taxes as a way of “making the rich pay.” Some people in this camp see corporations themselves as the problem; increasing their tax burden is a way of punishing them.

Both extremes are wrong-headed and naive. There are at least three reasons why jacking up corporate taxes is counterproductive, but none of them support the right wing dogma.

The first is that it’s easy to demonize corporations because of the way we’ve stereotyped them. The word “corporate” conjures up images of sleek office towers, multimillionaire CEOs and foreign headquarters. Corporate fat cats in Armani suits. Tack on the C-word to any number of nouns and it sounds nasty: corporate jet, corporate chef, corporate welfare, corporate agenda …

But the reality is that most small and medium-sized enterprises (SMEs) pay corporate taxes, and these are often the most vulnerable in a shaky economy. After a company grows to annual revenue of $500,000, it becomes taxable at the higher corporate rate (this threshold varies for some provinces). That’s not a lot of money. Most companies with even 10 or 20 employees would be well into this range. Many of them are family owned and operated, and form the backbone of their local economy. They certainly have no corporate jet.

When the political left wing shouts out that corporations should pay more, I doubt they’re targeting the small and medium-sized enterprises. But that’s what would result.

The second reason is that the very large corporations – the ones that do have corporate jets and overcompensated CEOs – are the most able to minimize their tax bills. This isn’t a criticism. A company minimizing their taxes through legal and ethical means is no different than an individual household claiming all eligible tax deductions to reduce their own tax bill.

But the larger the company, the more sophisticated is its army of tax lawyers and accountants. That gives them the edge in reducing their tax exposure. Most mom-and-pop companies with annual revenue of more than $500,000 have to calculate their own taxes with little more than downloadable software and a pot of coffee. The notion of jacking up corporate taxes to stick it to the big guy is silly. The big guy will figure out ways to avoid it.

Finally, raising corporate income tax rates is especially popular with social justice advocates, some of which see capitalism as unethical. Certainly, issues of poverty and income inequality are serious challenges, and they’re likely to grow more urgent in the coming years. But taxing corporations in the belief that they are unethical makes no sense. A corporation is just a set of rules and agreements between individuals. It can be no more or less “ethical” than can a bowling league or a road system. A corporation has no capacity for unethical decision making.

It’s the individuals who run the corporations that can veer into ethical and moral grey areas – and it’s their personal income levels that create issues of income inequality. That being the case, raising personal income tax rates on high-income individuals is the appropriate response. A steepening of the progressive income tax curve would achieve this.

Sadly, the debate on corporate income taxes almost always deteriorates into a shouting match between the left and the right. But something as important as finding the correct way to manage public finances in Canada cannot be left to the political pigeon holes of left-wing and right-wing economics.

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

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