Corporate Tax Should Increase and Tax Havens Need to End

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Corporate Tax Should Increase and Tax Havens Need to End

Before Covid-19, the middle class and poor were bearing a disproportionate part of the tax burden as corporate taxes continued to be decreased by both Liberal and Conservative governments for decades, while trillions were hidden away in tax havens with almost nothing been done to collect a fair share of taxes for the super-rich. The financial burden now created by Covid-19 makes it even more imperative to start rectifying this situation. 

If you think the struggle against COVID-19 has been hard thus far, wait until we get to the post-pandemic recovery stage. That's when the real battle will get under way.  On one side we will have those who, echoing the Canadian Liberal government of the 1990s, argue that public debt is the main challenge, adding that any increase in taxes on corporations or the wealthy would stifle economic growth. 

That is, not surprisingly, U.S. President Donald Trump's view. He manages to get (white) working class men to support him, nonetheless, by wrapping his elitist economic policies in nationalist, xenophobic and racist rhetoric. It is also the view of the Canadian conservative movement.  Former prime minister Stephen Harper has already put it out there, and right-of-centre think tanks, from the Fraser Institute to the C.D. Howe Institute to the Macdonald-Laurier Institute, are all weighing in on the side of what they characterize as fiscal probity. 

There are also many in the Liberal party who subscribe to this view, although they are, publicly, keeping their powder dry for the moment.

On the other side there are those who take a social justice point of view. They say we will need continued massive public investment, and for quite a while. As economist Jim Stanford put it in an article for Policy Optionsmagazine: "For many years to come, Canada's economy will rely on public service, public investment and public entrepreneurship as the main drivers of growth. They will lead us in recovering from the immediate downturn, preparing for future health and environmental crises and addressing the desperate conditions in our communities. The chronic weakness of private business capital spending in recent years was already indicating a growing need for public investment to lead the way. After COVID-19, it is impossible to imagine that private capital spending could somehow lead the reconstruction of a shattered national economy."

Now, an international team of progressive economists has weighed in on the social justice side, focusing, in particular, on the issue of taxation.  The group is called the Independent Commission for the Reform of International Corporate Taxation. It is supported by a worldwide coalition of non-governmental organizations, ranging from Oxfam to the World Council of Churches. The commission has just issued a manifesto entitled "The Global Pandemic, Sustainable Economic Recovery and International Taxation," which argues forcefully that now is not the time to reduce taxes in order to stimulate investment and economic growth. To do so, says the group -- which includes French economist Thomas Piketty and Nobel winner Joseph Stiglitz -- would be neither economically effective nor socially desirable.

Instead the commission proposes that all governments impose higher taxes on those massive corporations that dominate their sectors.  As well, governments should set a minimum corporate tax rate of 25 per cent.  The economists also recommend to the governments of the world that they impose digital services taxes on the huge economic benefits monster corporations such as Google and Facebook now enjoy. Finally, the commission advocates that all countries report fully on corporations that currently get government support, and, more important, publish complete information on all corporations' offshore wealth.

Cutting taxes exactly the wrong medicine

The manifesto emphasizes that governments will find themselves cash-strapped because, except for e-commerce multi-nationals and medical suppliers, the pandemic is creating economic havoc. The solution for governments, which will need the resources to pick up the slack from the struggling private sector for a long time to come, is not to further hobble themselves by cutting already low corporate taxes. 

"There is no evidence that the recent trend of lowering corporate tax rates has in fact stimulated productive investment and growth," the economists write. "As the world economy slowly recovers, tax cuts will not stimulate corporate investment because there is already excess capacity and expansion plans are constrained by uncertainty." The commission explains that "essentially, corporate taxes are a withholding tax on dividends, and thus, in effect, an income tax on the wealthy."  The reason for this, they explain, is that wealth from shares in companies is even more unequally distributed than earned income. 

The state, the economists say, has made the modern corporation, and the way it operates, possible. It has done this through the legal device of limited liability, which protects the personal assets of corporate executives and shareholders, and by government support in national crises. These are privileges which should also impose obligations on corporations, particularly taxation to fund necessary social services such as schools and hospitals. 

The hubris of the off-shore based cruise industry

The commission makes a powerful argument about tax avoidance and evasion, pointing to one industry that the pandemic hit hard, and which then went cap-in-hand to the U.S. government: "By exploiting tax havens in order to reduce their fiscal contribution, corporations logically give up their claim to support from the governments where most of their activity takes place. This contradiction is vividly illustrated by claims of cruise lines under flags of convenience for support by the U.S. It seems logical to forbid state support to corporations that are headquartered, or have subsidiaries, in tax havens, as some governments have already proposed." ...

"If the wealthy are not to bear a proportionate share of the economic burden of the pandemic, local income taxes and even international corporate tax coordination will not be sufficient," the manifesto argues. "Effective taxation of wealth, and in particular offshore wealth, needs to be put in place."

Just as wealthy New Yorkers fled to their country homes during the pandemic, the wealthy have been seeking shelter unavailable to the rest of us during the accompanying economic crisis.  Offshore tax havens provide that shelter. In the words of the worldwide team of economists: "The use of offshore structures allows not only the real ownership of this wealth to remain hidden, but also its location and perhaps its very existence. This same secrecy," they point out, "also creates fertile ground for tax evasion, avoidance, and for financial crimes."

Over to you, governments of the world, including a Canadian federal government that has done precious little about these "financial crimes."


Nothing shows how ridiculously low Canadian corporate taxes are than the fact that before 9:00 AM on January 7th of 2020 Canadian corporations had already earned enough money to pay all their taxes for the year, an amount that represents 1.75% of all income taxes. 

In other word Tax Freedom Day occurs on January 7th for corporations and June 19th for individuals. What a system! What fairness!

Canadian corporations have already earned enough in revenues in 2020 equal to what they will pay in federal and provincial income taxes for the year, according to a new report from Canadians for Tax Fairness.

The advocacy group says that as of 8:56 a.m. on Tuesday, Jan. 7, Canadian corporations have, aggregately, generated enough in operating revenues in 2020 to match the share of income taxes that they will pay this year — 1.75 per cent, the ratio in 2018, the latest year data is available.

The report dubs Jan. 7 as “Corporate Income Tax Freedom Day.” While corporate income taxes are based on profits, the group uses similar methodology to what is used in the Fraser Institute’s “Tax Freedom Day,” which is based on household revenue. That day last year was June 19.

Using corporate profits as the denominator, March 9 would be the date in which corporations have earned enough to pay their income tax total. That date is much earlier than it would have been in 1998, when the corporate tax freedom day was May 22.

Toby Sanger, director of Canadian for Tax Fairness and author of the paper, said the report speaks to how little corporate income taxes are paid in Canada, especially compared to previous years.

What we wanted to call attention to was how much corporate income tax rates have fallen, how little tax they pay in relation to their revenues and also in relation to their profit,” he said.

“If you look at it as a share of profits, if you look at corporate taxes … they’re at a half the rate that they were 20 to 25 years ago.”

Sanger’s report notes corporate taxes in Canada paid as a share of taxable income has dropped significantly over the last 20 years.

In 1998, corporations paid 38.7 per cent in income taxes as a share of taxable income. Fast forward to 2018 and corporations paid 18.9 per cent in income taxes as a share.

That year, Canadian companies generated $402 billion in taxable corporate income and paid $75 billion in federal and provincial corporate income taxes.

Meanwhile, the federal corporate tax rate has declined from 29.1 per cent in 2000 to 15 per cent in 2012, where it has remained since.

The report notes that tax cuts by different provincial governments have reduced the average provincial rate in Canada from 13.3 per cent in 2000 to 11.8 in 2018.

Since that year, Alberta’s corporate tax rate has declined to 10 per cent under the Kenney government, which plans to lower it to 8 per cent by 2022.

The paper also notes that business investment into machinery and equipment as a share of GDP has shrunk from 7 per cent in 1998 to 3.8 per cent in 2018.