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The legend of zero

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No politician is talking about it, but there is a growing debate about corporate tax cuts, and it's not about whether they should go up or down 1.5 percentage points. It's about getting rid of them.

Zero corporate income taxes.

It is fast becoming the legendary goal for tax reform in some opinion-makers' minds, and they are saying that economic theory proves them right. Not so fast.

Today's column by Doug Saunders in the Globe and Mail is the latest to climb onto this theoretical bandwagon.

Saunders marshals an economic justice line of reasoning to bolster the argument -- big corporations get away with tax avoidance, small ones can't.

But the key observation of economic theory is the compelling insight that corporations, not being people, don't pay taxes anyway -- they pass them through in higher prices and/or lower wages, or even lower dividends, at least in the short run. Stephen Gordon makes the case in his usual lucid and succinct style here.

So, since corporate taxes are totally worked into the system, what are the chances that prices will go down, or wages up when corporations pay less? That should be the effect of abolishing corporate taxes, right?

Chances are the windfall will end up in the pockets of shareholders, many of whom are non-residents to begin with. In the case of multinational corporations, which increasingly define our economy, eliminating corporate taxes would starve Canadian public treasuries (federal and provincial) and feed the treasuries of other nations, as argued here by Erin Weir.

What, exactly, is gained by Canadians? They get to pay more, and descend into bitter disputes about which services to cut.

In order to replace the revenue that corporations used to provide, Saunders says we should raise personal income taxes. Michael Hlinka (the voice of all things economic on my local morning CBC show) says raise the GST, the position of most other economic pundits who favour the theory of zero. They cheerfully acknowledge they would never get elected on such a platform, as in this debate between Hlinka and I.

Neither mention the likely losses that lie ahead with respect to public supports and services. In 2009-10, corporations contributed $30 billion to federal revenues alone. GST would have to go up by 5 percentage points to replace it. People in Ontario would have to pay an 18% sales tax on most purchases just to hang on to the inadequate service levels they've already got. Insert sound of choking at the mere suggestion of an 18% GST, and you can see how quickly service provision will deteriorate, not improve.

At least these theorists are honest enough to acknowledge that money will have to come from somewhere.

The Harper Gang believes cutting taxes make them grow. The fuel for this thinking is not evidence, not even so much theory, but hot emotion. Harper has built his career by expressing his hate-on for government intervention, perhaps nowhere more clearly than his statement: "I believe all taxes are bad."

So while zero corporate taxes are nowhere on the political radar right now, watch out Canada. Building more jails or eliminating the long-form census questionnaire was on nobody's radar a few years ago. Both are senseless policies, widely rejected. Both are happening anyway.

Sadly, it looks like more airtime will be devoted to discussion of zero corporate taxes in the next few days. It's sad because we are in the middle of an election campaign and should be talking about real issues, not theoretical ones; issues like health care and infrastructure deficits and where our resource-rich economy is headed.

That's what needs to be discussed during the election, but I've been booked for an online discussion about corporate taxes at the Globe and Mail next week. I will also be dancing with Charles Adler on the topic at 8 o'clock on Tuesday April 19 on Sun TV, the second night of the new hard-right broadcaster's debut week. (Faux News of the North launches on Monday.) I'll file at least one more blog on corporate income taxes at the Economy Lab, and will undoubtedly write more on the topic for this blog too.

But let me close today's blog by getting back to theory and principles of how an economy works best.

The corporate form brings together larger stocks of capital -- and thus higher rates of profit -- than is possible for individuals.

Corporations aren't people, but they have legal rights, just like people. Corporations are also protected, some would say advantaged, by the rule of law and a justice system that governs behaviour -- not always even-handedly. Corporate interests are represented, some would say overmuch, at every public decision-making table in the nation.

Corporations benefit from public policy, public institutions and public services, without which profits would be far, far lower.

If the argument is that corporations should pay nothing for these privileges and benefits, it's like saying they have rights but no responsibilities. And that flies against every principle of justice society holds dear.

A revolutionary war was fought and a nation was formed on the principle of "no taxation without representation."

You can try, but any theory that suggests it is in the public interest for the most powerful entities in society to have representation without taxation is unlikely to pass the sniff test of democracy.

This article was first posted on The Progressive Economics Forum.

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