FRASER INSTITUTE RESPONDS TO LABOUR'S CLAIM OF CORPORATE TAX RIP-OFFS
For Immediate Release: January 26, 1995
For Information Contact:
Dr. Filip Palda, Senior Fellow Fraser Institute
Prof. Ecole Nationale Administration Publique
Phone: 514-990-5204
VANCOUVER>>> 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: 62,000 profitable corporations paid no income tax in 1991 on profits of nearly $12 billion and as a result shifted the tax burden to ordinary Canadians.
FACT: The BCFL does not explain WHY those corporations did not pay tax. Here are the reasons, discovered in a 1989 study of 177,000 corporations done by the Ontario NDP government's Fair Tax Commission, of profits that were taxed:
-54% 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. If Widgets Inc lost $1 million last year and earned $1 million this year, over two years it has made no profit and should not be taxed within that two year cycle.
-4% of profits were exempt from taxation because the small business tax holiday (later abolished in Ontario).
-31% of profits were exempt either because these profits went to replacing depreciating equipment or because they were "paper gains", that is assets between members of the same corporate group without any economic gain or loss to the group.
In other words, in the the view of the Ontario NDP government, there was no evident problem of "corporate tax rip-offs".
The BCFL arrives at its corporate tax freedom day of January 26 by inflating the figures of corporate profitability.
BCFL CLAIM: Corporations in Canada are undertaxed.
FACT: 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%, a more than 100% increase.
Corporate taxes are only part of the taxes businesses face. In addition to rising corporate taxes in the 1990's Canadian businesses faced rising social security premiums, UIC levies, and workman's compensation fees.
BCFL CLAIM: Corporations should bear their fair share of taxation.
FACT: 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 and ironically some labour union retirement plans rely heavily on these same funds.
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 further work can be done such as R&D credits, corporate subsidies, and tax breaks for union controlled investment funds. One could also question the $1.3 billion per year collected by unions as dues used as deductions for personnel income tax by their members.
Tax breaks get 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.
Dr. Filip Palda, Senior Fellow of the Institute explained the need for caution when making claims about tax burdens: "We have a complex tax system which makes it very hard to understand what is going on. This is what politicians want of course. A complicated tax system makes it hard to see who is bearing the tax burden. If Canadians realized they were the ones paying corporate tax, governments and labour unions would not impress anybody with the cries about skinning the fat cats."