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.
CANADA'S EQUALIZATION PROGRAM DOESN'T PASS TRIPLE-E TEST
Release Date: February 12, 1996
Vancouver, B.C. > > > Equalization payments should be made to the Maritime provinces only, Canada's poorest region, according to the latest Fraser Institute study.
In The Uneasy Case for Equalization Payments, Dan Usher, Professor of Economics at Queen's University, examines the motivations, methods, and effects of Canada's current equalization system. He concludes that this $8 billion/year program is neither equalizing, efficient nor equitable. He recommends the program be scrapped or dramatically altered.
NOT EQUALIZING
Revenue to finance equalization payments is acquired by federal taxation of all Canadians, rich and poor alike. The net contributors to the program, however, are the taxpayers in the non-recipient provinces of Ontario, Alberta, and British Columbia.
Dr. Usher argues that the Canadian equalization program is almost certainly less beneficial to the poor than if $8 billion now spent on equalization were passed on to them directly. "Payments from the federal government to poor provinces may convey no net advantage to poor people as a whole."
Worse, he says, is that the program is likely to be a transfer from the poor in rich provinces to the rich in poor provinces.
NOT EFFICIENT
Usher cites three effects that make Canada's equalization program efficiency-reducing:
a) People are induced to remain in poor provinces (the Maritimes) where their earnings and contributions to national income are low, when they might migrate to rich provinces (Alberta, Ontario, B.C.) where their earnings would be higher;
b) Recipient provinces are induced to levy inefficient taxes to maximize receipts under the rules of the equalization program; and
c) Every province acquires an incentive to appear poor by hiding part of its tax base.
NOT EQUITABLE
The author also debunks the argument that equalization payments are equitable. First, he says, the program does not equalize tax revenues per head among the richer provinces. Second, it does not mandate equal tax rates across provinces. Finally, the details of the program are so arcane and open to change as to provoke precisely that competition over public largesse that genuine equity would avoid.
"The Canadian Constitution is downright schizophrenic over public ownership of revenue from natural resources," says Usher. "Section 92(A) assigns these revenues unambiguously to the provinces, but in mandating equalization payments, Section 36(2) suggests that no province can reap the harvest of the resources under its jurisdiction."
ABOLITION OR REFORM?
The Uneasy Case for Equalization Payments considers two courses of action in response to Quebec's possible separation from Canada. In the event of separation, it is recommended that English Canada abolish the equalization program in its entirety.
Should Quebec remain a part of Canada, it is recommended that equalization payments be restricted to the Maritime provinces only, and be denied to Manitoba, Saskatchewan and Quebec. The total cost of the equalization program would be reduced from $8 billion to just over $1 billion.
The enshrinement of equalization payments in the 1982 Canadian Constitution was a mistake, says Dr. Usher. Equalization should be no less subject than any other transfer program or tax law to revision or abolition in accordance with the will of the majority in Parliament.
For a copy of The Uneasy Case for Equalization Payments, please contact David Hanley at (604)688-0221, ext. 582.
Contacts:
Dan Usher, Professor of Economics, Queen's University, (613) 545-2250
Michael Walker, Executive Director, The Fraser Institute, (604) 688-0221, ext. 545