Corporate tax breaks can soften your retirement
The proposed reduction in the U. S. headline rate for corporate taxes from 35 per cent to 20 per cent is prompting predictable arguments. The objectives of the cut include strengthening U. S. competitiveness and spurring economic growth by bringing U. S. corporate tax rates more in line with other j urisdictions. Opponents are using the classic argument that corporations will benefit from a big giveaway at the expense of hard-working Americans. While this a classic argument, it is not a timeless classic but one ready to be put out to pasture thanks to greater reliance by workers on equities for retirement savings.
The reality is that the benefits of corporate tax cuts are dispersed across different groups. Shareholders enjoy higher returns while employees earn higher compensation and customers benefit from lower prices. Both advocates and opponents of corporate tax cuts in the U. S. do not dispute this. Their views differ on the proportion of benefits each group receives. Opponents argue that most of the benefits from cutting corporate taxes go to shareholders, and the portion received by workers is outweighed by the taxes workers will ultimately have to pay.
Whether or not the argument against corporate taxes cuts ever had some vali dity, t he world has changed. A prolonged period of low interest rates has prompted a shift to riskier assets in a search for yield. Working Americans have more of their personal financial assets invested in corporate equities rather than fixed income securi ties. Consequently, they are very reliant on corporate profits through investments held in retirement savings vehicles such as employer pension plans and individual retirement arrangements. According to the OECD pension database, American workers held US$ 5 trillion or one third of retirement assets in public equities in 2016. A further US$ 4 trillion was invested in mutual funds of which a substantial portion would be in equities.
When commentators in Canada discuss the implications of corporate tax rates in the U. S., the focus is usually on competitiveness. Lower U. S. corporate taxes will make the U. S. more attractive relative to Canada in competing for investment unless Canadian f ederal and provincial governments follow suit. But lower U. S. corporate taxes also benefit Canadian savers. Canadian workers also have much of their retirement assets tied up in equities. All working Canadians own equities through the recently expanded Canada Pension Plan ( CPP), or the Quebec Pension Plan. The investment vehicle of the CPP, the Canada Pension Plan Invest- ment Board, has over half its assets invested in public and private equities. As is the case in the U. S., Canadian private pension plans and other retirement savings vehicles are also highly invested in equities.
Because of t he s mall size of Canadian capital markets, which tend to be concentrated on a small number or sectors such as financials and natural resources, Canadians mostly have a significant portion of their retirement savings in foreign capital markets including the U. S. Hence, Canadians benefit from lower corporate tax rates in other jurisdictions.
As is the case in the U. S., some Canadian politicians continue to ignore the benefits of lower corporate taxes and are insensitive to the reliance of Canadian workers on corporate profits for their retirement incomes. Provincial governments in Alberta and B.C. raised their corporate tax rates immediately on coming to power. A major plank of the federal NDP in the last election was that it would raise corporate taxes using the argument that corporations “should pay their fair share,” seemingly oblivious to the fact that tax burdens ultimately fall on people. At the other end of the political spectrum, the recently released Ontario Conservative election platform fails to mention corporate tax rates, thus ignoring the need for Ontario to remain competitive.
If poli t i c i a ns opposing lower corporate taxes i n Canada or elsewhere wish to be honest with voters they will note that this means workers will not benefit from paying less in taxes and will ultimately have smaller nest eggs to retire on. Canadians should welcome lower corporate taxes in Canada, the U. S. and everywhere around the globe.
CANADIANS MOSTLY HAVE A SIGNIFICANT PORTION OF THEIR RETIREMENT SAVINGS IN FOREIGN CAPITAL MARKETS.