FRASER INSTITUTE RESPONDS TO LABOUR'S CLAIM OF CORPORATE TAX RIP-OFFS

Release Date: 25 January 1996

Vancouver, B.C. > > > In response to a BC Federation of Labour announcement that Canadian corporations pay little tax on profits, The Fraser Institute has released the following information:

BCFL Claim: 66,000 profitable corporations paid no income tax in 1992 on profits of nearly $14.7 billion. and as a result shifted the tax burden to ordinary Canadians.

Reality Check: The BCFL does not explain why those corporations did not pay tax. Here are the reasons why some profits were not taxed, discovered in a 1989 study by the former Ontario NDP government's Fair Tax Commission:

* 54% of profits were in corporate dividends or equity income earned by subsidiaries. That is, profits earned by a branch of the corporation which had been taxed, then transferred to another part of the corporation;

* 11 % of profits were earned by firms which in the year before had made a loss. The tax system takes a long view of profits and allows firms to carry their losses forward.

* 31 % of profits were exempt either because these profits went to replacing depreciating equipment or because they were "paper gains," that is assets exchanged between members of the same corporate group without any economic gain or loss to the group.

In other words, in the view of the former Ontario NDP government, there was no evident problem of "corporate tax rip-offs".

BCFL Claim: Corporations in Canada are undertaxed.

Reality Check: Between 1987 and 1991, a time of falling corporate profits, the federal government closed many loopholes and increased the amount of tax paid by corporations from $9.8 billion to $11.7 billion. This meant that federal corporate taxes as a percent of profits went from 17.5% to 36.9%. or more than a 100% increase.

BCFL Claim: Corporations should bear their fair share of taxation.

Reality Check: Corporations do not pay tax any more than a brick or a tractor pays tax. It is the owners of the corporations, their workers (union and non-union), and the consumers of their products who must bear the burden. Fraser Institute calculations suggest that up to 51 % of all corporate taxes are paid by the elderly. That is because they depend on income from money invested in pension funds. Ironically, some labour union retirement plans rely heavily on these same funds.

"We have a complex tax system which makes is very hard to see who is bearing the tax burden," says Filip Palda, Senior Fellow at the Fraser Institute. "Of course this is what the politicians want. If Canadians realized they were the ones paying corporate tax, governments and labour unions would not impress anybody with cries about 'skinning the fat cats'."

Tax breaks lead Canadians to invest their money in opportunities that look good only because they are lightly taxed. A good tax system should be neutral, in the sense that only true economic signals, not tax breaks, guide investments.

However, the BCFL is right in pointing out that much needs to be done in reforming the corporate tax system. Even though many loopholes have been closed in recent years, one could question the $1.3 billion per year collected by unions as dues, used as deductions against personal income taxes by union members.

Contact: Dr. Filip Palda, Senior Fellow, The Fraser Institute; Prof. Ecole nationale administration publique, 514-990-5204.