Time for another look at our tax code
Canada, more than many countries, has embraced the dubious notion that corporate tax cuts are an economic panacea, a sure way to spur economic growth and drive job creation.
Over the last three decades, successive governments, both Liberal and Conservative, have cut the federal corporate tax rate from 36 per cent to 15 per cent, now among the lowest in the developed world and lower than even the tax-allergic United States. During this time, corporate profits have soared, yet the purported public benefits of these cuts have by and large failed to materialize.
Touted as among the best ways to create jobs, corporate tax cuts have by most accounts turned out to be no such thing. According to Ottawa’s own numbers, every dollar spent on infrastructure spending, income supports or housing investments is seven times more effective in creating jobs.
Moreover, predictions of a boom in business investment have proved unprescient. Between 1981 and 1990, for instance, the corporate tax rate was cut by 8 percentage points, yet business investment as a share of the economy actually fell.
Between 2000 and 2009, the tax rate was slashed by a further 10 points; meanwhile, businesses invested no more than they had in the previous decade, choosing instead to sit on ever greater piles of money or to use that money in ways that increased short-term profits without creating jobs.
There is inevitable disagreement about the true upshot of corporate rate cuts and the extent to which they have contributed to growth, but the cost in the form of deepening inequality is indisputable.
The tax bills of most big companies have declined significantly both as a proportion of their profits and as a proportion of Ottawa’s total tax revenue. This means that shareholders of Canadian companies, a disproportionately wealthy, often foreign group, continue to get wealthier, while the average taxpayer foots a greater portion of the bill for public expenditures and governments have less to spend on programs and services that help the many and particularly the most vulnerable.
Making matters worse, the decline of corporate contributions to the public purse is greater than even our diminished corporate tax rates would suggest. A six-month joint investigation by the Star and Corporate Knights Magazine has revealed that for every dollar corporations pay to the Canadian government, individual taxpayers now pay $3.50 — a result not only of repeated cuts, but also of a slew of tax loopholes and international treaties introduced in recent decades that promote or at least facilitate corporate tax avoidance.
The Star’s Marco Chown Oved and Corporate Knights’ Toby Heaps and Michael Yow found that, using creative accounting and offshore tax havens, Canada’s 102 biggest corporations have exploited legal means to avoid paying $62.9 billion in income taxes over the past six years. That’s more than enough money to pay for, say, both national pharmacare and universal daycare or, depending on your bent, to eliminate last year’s federal deficit nearly four times over.
Big banks, in particular, are adept at navigating these tax rules, the investigation has revealed. Last year, the Big Five banks, which collectively raked in $44.1 billion in pre-tax profits, used tax breaks and offshore havens to avoid paying $5.5 billion in taxes. Other countries, such as the United Kingdom and Australia, have curbed the ability of banks to avoid paying their share by imposing a special bank levy, a move long championed by a number of Canadian tax experts. Introducing such a measure here would be a welcome step. But clearly much more is needed.
The corporate tax system is just one part of the problem. While it’s true that corporate taxes are a smaller portion of the total of tax revenues after years of rate cuts, ever more loopholes and the increasing ease of moving capital globally, that’s in a context in which the top marginal income tax rate has also gone down and overall tax revenue as a percentage of the economy has declined, putting us well below the OECD average.
As Gabriel Zucman, an economist at Stanford University, told the Star, “Some countries, including Canada, have attempted to dramatically cut taxes on the wealthy and let corporate tax avoidance prosper.” This process, begun in 1980s, has yielded a clear outcome: “income and wealth have boomed for a tiny fraction of the population, but this has not benefitted the rest of the population at all.”
The result of all of this is that governments have less revenue to do what’s needed, our tax system is less progressive and corporations pay a reduced share for our public goods and services even as their profits continue to break records.
Our tax system is a mess. It’s leaking resources government needs; it’s regressive, contributing to corrosive inequality; and it’s increasingly complicated and incoherent.
In response to the Trudeau government’s ongoing small-business tax-reform fiasco, the Senate finance committee recommended that Canada undertake a comprehensive review of our tax system of the kind not seen since the Carter Commission of over 50 years ago. This is exactly what’s needed. The latest revelations about our leaky corporate tax system, on top of the bombshells of the Panama and Paradise Papers, make inescapable the unfairness and inefficiency of our tax system. The challenge won’t be met by mere tinkering.
Our tax system is leaking resources government needs; it’s regressive, contributing to corrosive inequality; and it’s increasingly complicated and incoherent