Lots of talk these days about corporate tax rates. Since everyone is chatting, let’s take a moment to blow your mind. Corporate taxes aren’t what you think and the philosophy behind them is changing. Let’s start with an income statement.
A standard statement looks like this: after sales are recorded and expenses are paid, you’re left with two values: “profit before tax” and “profit after tax.”
| Income | 100 million |
| Expenses | 50 million |
| Profit Before Tax | 50 million |
| Tax (at 26%) | 13 million |
| Profit After Tax | 37 million |
Which number do you think corporations manage to? It’s profit after tax. So when the Royal Bank does its forecasting they see financials like this: in essence managing tax like any other expense.
| Income | 100 million |
| Expenses | 63 million |
| Profit | 37 million |
This means tax is factored into price just like any other cost. So if taxes go up, prices go up. And if taxes come down, so does price. It seems strange at first but you’ll see that corporate taxation is just like adding GST. Companies don’t actually pay it, people do.
History
The Canadian tax system, both personal and corporate, started in 1917. Before then, government got its funding from import duties and excise taxes (on items like fuel, booze, and cigarettes). In the early days (up to the 60s and 70s), combined provincial and federal rates on large corporations was in the neighbourhood of 48%. This rate has since dropped to around 27% (it varies by province) and we now have GST—so you could add another 5.
It’s not that governments are dumb, we’re still learning. And the field of economics is rather new so theories continue to evolve. Corporate taxes are inflationary because they get hidden within consumer price. That’s why they’re being reduced. If the government increases taxes, companies simply increase price. And if taxes go down, the market system says prices do too. In the end, it’s just a rate of money collected by business for government. Companies don’t actually pay it.
Government services get paid for by you, the public. That’s it. There is no magic bullet. And you can either contribute through income tax or pay at the pump.
GST
The practice of value-added taxation, which Canada borrowed from abroad, is also quite interesting. GST is a good idea. Why? Because it doesn’t matter if companies make a profit. Nor does it care if you use fancy loopholes on your individual return. There’s no way around it. The idea behind a value-added tax is brilliant and its worldwide adoption is growing.
Summary
Everything is a balancing act with taxation no exception. Canadian governments have a number of ways to collect revenue to ensure services get paid. Our multi-faceted approach works well and our system is tight. You can always argue about lowering rates but the structure is sound.
Our friends to the south are different. They recently reduced corporate tax rates, coming in line with modern economic thinking. The reasoning was to make America more competitive in a global world. The old system was blocking them from doing business internationally because foreign customers didn’t want to pay for American healthcare. So making this move was the right thing to do. Now what they need is some form of GST. Just wait for that fight.