Fri, 22 Sep 2023

Why we need to rewrite the script on corporate taxes

The Conversation
07 Jun 2023, 04:38 GMT+10

During the provincial election campaign in Alberta, the United Conservative Party (UCP) frequently criticized the NDP for its proposed increase in the corporate tax rate from eight per cent to 11 per cent.

UCP candidate Brian Jean said the proposed NDP corporate tax increase would kill investment, jobs and economic growth in Alberta. But University of Calgary economist Trevor Tombe has argued an increased tax rate won't necessarily erode employment and that the impact would depend on how much the tax base shrinks in response to the higher rate.

By way of background, when the UCP came to power in 2019, it reduced the corporate tax rate from 12 per cent to eight per cent in 2020 with the onset of the COVID-19 pandemic.

Consequently, Husky Energy benefited from about $233 million in tax cuts, but laid off hundreds of workers. The company used Luxembourg as a tax haven.

Likewise, Cenovus saved $658 million from the tax cut but announced it would eliminate up to 2,150 jobs.

This suggests that the script on corporate taxes needs to be rewritten. To borrow from economics Nobel Laureate Paul Krugman, such a script rests on "zombie ideas" that pander to corporate interests, harm the public interest and refuse to die.

Excludes citizens

The public shouldn't have to delve into the technical aspects of taxation to participate democratically on the issue of corporate taxes. According to the authors of The Econocracy, the highly technical jargon of economics discourages citizen participation. But they argue economics are "too important to be left to the experts."

Similarly, University of Cambridge economist Ha-Joon Chang has argued that "good economic policy does not require good economists." He adds that economics as it has been practised since the 1980s - in short, neoliberalism based on tax cuts, deregulation and liberalization - has been harmful.

Read more: What exactly is neoliberalism?

This means that standard economics, while couched in sophisticated mathematical jargon, is based on a subjective world view. I noticed this in my work on teaching economic inequality, a topic that's not usually addressed in a routine Economics 101 course.

On the one hand, there is standard research that suggests that the cost of raising corporate taxes is borne by labour through wage reductions, and that reducing provincial corporate tax rates increases the growth rate and the real per capita GDP.

But there's also a signficant body of research that indicates corporate tax cuts are associated with lower investment levels as large corporations stockpile cash - used for share buybacks, dividend payouts and higher CEO pay - instead of expanding industrial projects and employment.

These findings highlight that the post-1980s decades of corporate tax cuts are associated with anemic GDP and employment growth.

Income inequality worsens

Since the mid-1990s, inequality has grown faster in Canada than the United States. Canada's tax-and-transfer system, which relies on taxing income and providing Employment Insurance and other benefits, isn't reducing inequality as much as it did before the mid-'90s.

Specifically, despite increases in worker productivity, average real wages have stagnated while corporate profits have skyrocketed.

This inequality manifests through middle-class household debt and significant personal savings of CEOs. A recent report indicates that while an average worker's salary was $58,800, the top 100 CEOs obtained an average compensation of $14.3 million. This means a top CEO makes 243 times the average worker's salary in Canada.

Canadian economists like Lars Osberg and David Green argue that higher CEO compensation comes at the expense of other workers' income. What's more, higher top tax rates would dissuade CEOs from extracting a bigger salary since they'd have to pay higher taxes.

This viewpoint parallels that of economics Nobel laureate Abhijit Banerjee, who argues that governments should reverse corporate tax cuts. Likewise, other U.S. academics have proposed plans to end corporate tax evasion.

Risks overblown

According to Osberg, the risk of corporations leaving juridictions because of higher taxes are overblown. He argues that rich entrepreneurs shift to places with excellent public services including "pothole-free roads, nice parks and crime-free public spaces."

He points to New York and California, which have among the highest corporate tax rates in the U.S. yet a heavy corporate presence with Wall Street and Silicon Valley respectively.

In terms of the impact on the tax base, Osberg argues that the response of high earners to changes in the top tax rates is small because the importance of relative income, social standing and having high-status goods keeps them motivated to work hard.

Other influential academics in the U.S. have pushed a consensus viewpoint on combating inequality, arguing that economists should be at the forefront of tackling the wealth gap instead of making the usual naysaying arguments that these efforts aren't affordable or that there's no evidence to support taking action.

It's time to rewrite the script on corporate taxes. There is a multitude of evidence that shows raising corporate taxes can combat economic inequality, one of the most important issues of our times apart from climate change.

Doing so would empower citizens to fully participate in democracy.

Author: Junaid B. Jahangir - Associate Professor, Economics, MacEwan University The Conversation

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