October Questions & Answers and October Graph

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Joel Emes

October Graph

Q: How much tax do corporations pay?

A: None. In the end, corporations do not pay tax, people do. Think about what a corporation is - machinery, contracts, office space, employees, shareholders, bondholders, and so on. These parts work together to make income for people, so corporate tax is, therefore, a tax on people. The corporation itself cannot pay the tax because it is not the final destination of the income it generates. In the end, people pay the corporate tax. There are, of course, corporations owned by wealthy families and these families bear a portion of the tax. There are also many ordinary working people, however, who entrust their savings to mutual-fund managers. These managers invest this money in corporations and the income of those corporations flows back to these small investors. Approximately one-half of all Canadians now own shares, directly or indirectly, in the Canadian banks. Money set aside by employers for pensions is also invested in corporations. For example, OMERS, the Ontario Municipal Employees’ Retirement System, is one of the largest stock owners and traders in Canada. With the above caveat in mind, we can analyze the tax that gets levied on corporations. Direct taxes on enterprises1 were $30.4 billion in 1998, which was 34.6 percent of pre-tax profits and 8.9 percent of total tax revenues (see table 1).

Q: Has the share of government revenue from enterprises fallen over the last three decades?

A: Yes. This question often comes up in discussions of tax fairness and is usually coupled with claims that corporations do not pay their fair share of taxes. Unfortunately, this question is not relevant. This month’s graph shows taxes as a percentage of profits, direct taxes on enterprise as a percentage of total tax revenue, and enterprise profits before tax as a percentage of GDP. What is clear from this graph is that taxes on enterprises are highly related to pre-tax profits. In years of high profits, taxes are high; in years of low profits, taxes are low. This uncertainty in tax revenue from enterprises explains the real reason that enterprise tax as a percentage of the total has fallen - governments have sought out more stable sources of revenue. The solid line on the figure shows that direct taxes on enterprises as a percentage of pre-tax profits have fluctuated greatly but have remained between 24 and 41 percent. While taxation on enterprises has remained fairly constant, other forms of taxation, mainly the personal income tax, have grown.

Q: Are there any taxes levied on corporations that do not depend on profit?

A: Yes, and increasingly so. Table 2 lists the corporation and bank capital tax rates that were in force in the provinces in 1987 and 1998. The federal government also levies these profit-insensitive taxes. The shaded areas show jurisdictions that either implemented or increased a capital tax. Prince Edward Island, Nova Scotia, New Brunswick, Alberta, and British Columbia implemented new capital taxes in this time period. All provinces currently levy profit-insensitive taxes on banks and only two, Newfoundland and Prince Edward Island, that do not levy such a tax on corporations. These taxes look insignificant until you consider that the base for such taxes is larger than for the income tax, and these taxes must be paid even if the company posts a loss for the year.

Notes

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Last Modified: Friday, October 22, 1999.