Canada pondering reduced tax rates to boost prosperity

Some in Canada are proposing an intriguing idea: reduce corporate income taxes to zero. 

It’s not as radical as it sounds: it would eliminate double-taxation of dividends, attract job-creating investment capital from around the world, and help Canada to close some of its prosperity gap with the USA (per capita GDP).  Canada might just be hitting on a way (tax cuts) to quickly boost its share of the world’s tax base—just as Ireland has already done so successfully via their low tax rates. 

In the USA, on the other hand, the political climate would of course make a similar proposal laughably impossible.  The vast supermajority of our politicians and journalists behave as if boosting our general prosperity is nowhere near as important as scoring points against political opponents.  Because the “corporation” in general is still a favorite whipping boy, no serious US politician would be stupid enough to propose a zero corporate income tax.  That would surely be more than ample ammunition for their opponents; it would be equivalent to political suicide. 

As a result, we can look for Canada to start closing their prosperity gap with us, if their zero idea goes through.  (I wonder how many US corporations would set up shop or expand operations in Canada and start exporting to the USA, for example?) 

Comments

[Bob]

Steve,

Sounds "gimmicky" to me. Actually, if one reads the whole article it does speak to Canada's labor laws and life style (similar to Western Europe, BTW)as major contributors to the gap as well.

I find this excerpt just a tad bit Pollyanish:

"Mr. Martin says it would be smarter tax policy to tax dividends and personal income tax. With the spare funds, businesses could then invest "like crazy," boosting wages, lowering prices and crucially, boosting Canadian productivity or output per worker, one of the key reasons for the prosperity gap with the United States."

Come on! How many businesses out there are going to pay people more because they are sitting on excess cash?

Anyway, when Buffet made reference that his 9 nine person "headquarters" completed Berkshire's 7 foot tall stack of IRS filings he also commented that if all US corporations ponied up what they should we'd be in great shape (or something like that).

If we got rid of legacy stuff like SPE's and other loopholes we could likely cut rates and still come out ahead. But as long as Congress derives power from creating tax law it ain't gonna happen. I mean, what else would they do?

[Robert Schwartz]

Canada needs to import capital, so lowering the tax rate on corporations is a good idea for them.

The US does not need to import capital. It flows here constantly, witness our trade deficit. The correct solution is to cut the tax rate on dividends to zero. The 15% rate on dividends was the first step on that road.

[Kevin]

But my friend, you talk as if that's a real prospect up North. It's not -- that's just one guy's opinion in a newspaper. Canada would never do that, because they'd fear they could never pay for their health care without that tax revenue. Surely Canada is even less likely than the U.S. do so something so clever.

Would be interesting to ponder what exactly WOULD happen with zero corporate tax. What would NOT happen is businesses moving to a permanently higher profit plateau.

The competition in the consumer and labor markets would either make them cut prices, increase compensation, or both. They'd have to, to make up for increased individual taxation.

[Steve]

Kevin,

I read a book years ago titled "Frontiers of Tax Reform" by Boskin (I think). In it, as I remember, a case was made in one section that a zero corp tax rate would be offset by corresponding increases in personal income tax receipts. I can't remember the reasoning, but I'll look it up.

[JoeG]

Dropping the corp tax rate to zero might have one major impact: Because of the increase in personal taxes, it might increase my participation in this republic of ours. I might just pay a little more attention to what government is spending and who is getting the earmarks.

[Bob]

"I might just pay a little more attention to what government is spending and who is getting the earmarks."

Joe, you're assuming that there are enough honorable people in government who would care. Pardon my cynical comment (this is an optimists blog after all)but while I do tend to favor one party over the other my view is that there are too many hacks and favors owed
in both of them for real change.

I do have hope for a viable third party, though. When - not sure. But I do think the time is coming

[Aaron]

Dropping our corporate tax rate to zero also helps elminate transfer pricing problems and would encourage the repatriation of profits.

[Jim]

"I might just pay a little more attention to what government is spending and who is getting the earmarks."

Joe,

Currently, according to the IRS.gov tax stats site, FY2004 corporate income tax collections were $230B. Individual income tax collections were $990B, not counting employment, gift, or estate taxes. That says "individuals" (avoiding the arguments of who is in that group) are paying 80%+ of the income taxes as is. My question is, will you pay more attention when individuals bear 100% of the burden if you don't pay any attention at 80% of the burden?

[Dr. Ron Paul]

Looked at the Debt clock on this site and it reminded me of a funny story. So here it is:

It was autumn, and the Red Indians on the remote reservation asked their new chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn’t tell what the weather was going to be. Nevertheless, to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But, being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked, “Is the coming winter going to be cold?”

“It looks like this winter is going to be quite cold indeed,” the meteorologist at the weather service responded.

So the chief went back to his people and told them to collect even more wood.

A week later, he called the National Weather Service again.

“Is it going to be a very cold winter?”

“Yes,” the man at the National Weather Service again replied, “It’s definitely going to be a very cold winter.”

The chief again went back to his people and ordered them to collect every scrap of wood they could find.

Two weeks later, he called the National Weather Service again.

“Are you absolutely sure that the winter is going to be very cold?”

“Absolutely,” the man replied.

“It’s going to be one of the coldest winters ever.”

“How can you be so sure?” the chief asked.

The weatherman replied, “The Red Indians are collecting wood like crazy.”

[Steve]

Kevin:

Found it. When corp tax rate is zero, the owners of the corp pay the tax in one or both of two ways: (1) part or all of the higher earnings are paid out as dividends, taxed at the owner's marginal tax rate; and (2) if some of the earnings are retained, the stock appreciates, assuming a constant P/E ratio, on which the owner eventually pays capital gains tax.

The current corp tax is just a different way of taxing the owners. (The tax is levied at the source instead of at the destination.)

[Bob]

Steve,

So the government is going to get it's tax one way or the other which makes the assertions in that article even more ridiculous to me. By having no tax to pay does that mean all of sudden the corporation is more generous?

I'm particularly amazed by the suggestion that employees will get paid more. Employees get paid pretty much by the laws of supply and demand. Flood the market with relatively equally skilled engineers with constant demand and the salary (or total compensation) will decline. Vice versa. That's why pharmacists are so highly paid for counting out pills. Not enough pharmacists for all the Walgreens.

[Kevin]

Steve -- thx for the scholarly assist. But I'd suggest to that professor option #3: competing businesses will jump on the lower cost structure by slashing prices, thus returning to the same margins. Their lower prices will just equalize the higher consumption tax that would definitely be imposed by whichever compromise changed the tax code in the first place!

But Bob, it's reasonable to expect this would in fact lead to higher wages (option #4). Yes wages are set by supply and demand. But demand by definition is the pool of money employers are willing to spend compensating employees. Lower taxes would very likely free up money for this pool of demand, shift the demand curve right.

So long as we have competition I'm convinced that most or all of the benefit would flow to individuals as consumers or workers or both -- just as enormous growth in productivity does not in the end make businesses more profitable as a statistical average -- b/c their competitors are also increasing productivity.

[Bob]

Kevin, I'm going to stick to my guns here by speaking from experience. In the late nineties I ran a field office for a large corporation. One business line required low voltage cable installers - semi-skilled labor. Well, if you recall that was the same period when networks and broadband were at their peak. We were in a bidding war for the labor paying rates that just about put them equal to more highly skilled technical labor. In other words, there wasn't enough supply of the labor to meet the demand. Taxes had nothing to do with the decision to pay these people. Nothing.

I concur that EPS or the Dividend Payout Ratio should increase making the zero tax attractive to investors. However, it's not likely that those same investors will jump in because the prospectus or a quarterly conference call touts that the firm pays it's employees more. As a matter of fact if COGS or Op-Ex increases due to higher wages and earnings are reduced you can bet your booty they will raise a fuss.

[Kevin]

Bob, I'm not sure now if you are trying to support my argument or oppose it. But thank you for agreeing with me by your example that, even at the level of a real- world field office, a rightward shift in the demand curve does indeed increase compensation for labor, just like the textbooks say. Sometimes one enjoys seeing real world evidence support theory.

[Bob]

Kevin,

"What he got here, is failure to communicate"

I still oppose your view that a zero corporate tax would increase compensation. (lower taxes would very likely free up money for this pool of demand). My real world example was that demand increased the wage and that the corporate tax rate had nothing to do with the decisions to pay. It could have been zero or 65% and nothing would have changed. We would have had to pay the going rate, which was increasing as demand outpaced supply.

Conversely, if the market was flooded with this labor and our demand was relatively constant, we would be in a buyers market. Folks with that limited skill that wished to remain in that occupation would have found us paying quite less. Again, I doubt the corporate tax accountants would have been calling us to give
anyone a raise.

BTW, this particular company, while having it's corporate offices in the U.S., is actually based in Bermuda for........tax purposes. It enjoys a rather significant tax advantage and I can tell you straight out it does not pay employees any differently.

So we disagree completely on the notion that a reduction in corporate taxes increases compensation.

[Chui Tey]

Foreign investments taxed at 0%, while local investors pay all taxes. There's something wrong with this picture, especially with resource companies, who will fight tooth and nail against any royalty rises to adjust for any investment attractiveness.