Organized Labour's Corporate Tax Freedom Day

A Fraser Institute fact sheet to waylay the myths

Contact:

Joel Emes, Research Economist
The Fraser Institute, (604) 714-4546, Email: joele@fraserinstitute.ca

Release Date: 28 January 1997

VANCOUVER, BC>>>  The end of January is the traditional time for labour groups to announce "Corporate Tax Freedom Day". On this day (30 Jan 97), it is claimed, corporations have earned enough to pay their taxes for the year. More noteworthy, however, is the absurd methodology used to calculate Corporate Tax Freedom Day.

Labour groups declare that the share of federal revenues paid by corporations is eight percent, and that therefore corporations must be free of their tax obligations after eight percent of the year has elapsed, or end January. At best, this date could be described as "Federal Corporate Revenue Day."

The correct calculation for a Tax Freedom Day is total taxes paid as a percent of total income, in this case, profits. Using federal and provincial direct taxes as a percent of corporate profits, Corporate Tax Freedom Day would fall on or about April 26. Adding indirect taxes -- corporate capital taxes, natural resource levies, and property taxes -- would push the date much later into the year. These profits are taxed again when they are paid out to individuals via mutual funds and dividends.

The following list of myths versus facts is intended as an aid to better understand the complicated issue of corporate taxation in Canada.

Myth: 81,000 corporations in Canada paid absolutely no tax on profits of $17 billion in 1994.

Fact: A study by the Ontario government's Fair Tax Commission shows a different picture. The Fair Tax Commission---which reported to Premiere Bob Rae's NDP government -- analyzed a rare survey done in 1989 of 177,000 corporations in Ontario. Of the profits that were not taxed:

• 54 percent were intercorporate dividends or equity income earned by subsidiaries. That is, profits earned by one branch of the corporation which had been taxed, then transferred to another part of the corporation. Taxing these transfers of money would be like taxing a person for moving his wallet from one pocket to another.
• 11 percent of the profits not subject to tax were earned by firms which in the year before had lost money. The tax system takes the long view of profits and allows firms to carry their losses forward. If Widgets Inc. lost $1 million last year and earned $1 million this year, over two years it has not made any profit and so should not be taxed within this two-year cycle.
• 31 percent of profits were exempt either because these profits went to replacing depreciating equipment or because they were "paper gains," that is, assets transferred between members of the same corporate group without any economic gain or loss to the group. Government allows companies to deduct the cost of machinery from taxable profits to avoid absurd situations such as this one: a company earns $1 million in profits but to fix worn-down machines and stay in business the company must pay $2 million. In fact the company has made a loss. It makes no sense to tax it.

Myth: Corporate profits are at record highs, but corporations are paying less tax than ever before.

Fact: Corporate profits are not at record highs. While on paper corporate profits have nearly doubled since 1992, after taking inflation into account, they are lower than they were in 1987. Corporate income taxes as a fraction of profits have remained stable around 30% for the last 20 years. It should also be noted that profits taxes are only a part of what corporations pay to governments. Corporations also contribute to payroll taxes (EI, CPP, workers compensation, provincial health and post secondary education taxes), real property taxes, and local business taxes.

Myth: Corporations can afford to pay a little more so that Canadians do not pay for government cost cutting.

Fact: In the end, corporations do not pay tax, people do. Salaries fall, prices rise, and shareholder dividends shrink. Shareholders seem like invisible people, which is perhaps why corporations make an easy target for social activists. Who are these shareholders? Just about anyone with money in a company pension fund, or an RRSP. There is no complete survey of who owns stocks in Canada, but some examples can give a clue. OMERS is the fund that invests on behalf of 260,000 Ontario municipal employees. It is one of the largest traders on the Toronto Stock Exchange, and controls $21.3 billion of assets. Either individually or through organizations such as OMERS one in two Canadians owns shares in Canadian banks. Canadians can also become shareholders through RRSPS. In 1993 over five million Canadians invested $19.2 billion in RRSPs. The fact that in the end individuals pay the corporate tax makes Corporate Tax Freedom Day a meaningless measure of who pays taxes in Canada.

Myth: Corporations are the only ones to get tax breaks.

Fact: Union controlled venture capital funds cost government $140 million in foregone revenue in 1995. Unions control a third of all venture capital funds in Canada. Canadians who put their money in these funds receive provincial and federal tax breaks.

Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver.

For further information contact:

Suzanne Walters, Director of Communications,
The Fraser Institute, (604) 714-4582,
Email suzannew@fraserinstitute.ca

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