Who Bears the Brunt of Corporate Tax Cuts?

Proposals for raising corporate taxes will result by fewer Canadian investments, decreased productivity, and poorer working conditions for employees.

In October, the Official Opposition unveiled its plan to get public finances in order and reduce the budget deficit to one per cent of GDP within two years. The government, meanwhile, foresees a return to budgetary balance in the 2015-16 fiscal year. While we should be welcoming this bipartisan commitment to re-establishing a balanced budget, there is an unfortunate downside to one of these proposed measures. The Opposition has suggested cancelling scheduled corporate tax cuts (set to drop to 15 per cent in 2012). This would not only hamper economic recovery, but also seriously harm Canadian workers.

Taxing business revenue extracts a portion of each company’s profits. When these taxes are raised, companies tend to invest elsewhere and the Canadian economy loses investments that could have increased productivity. However, the link between taxes and productivity is not widely appreciated as the cost of raising corporate taxes is born by Canadian workers.

The more productive a company is, the higher salaries and better overall working conditions they can offer their workers. Highly productive companies can also afford to pay higher prices to their suppliers, which in turn allows those suppliers to offer better salaries and conditions to their employees. Raising corporate taxes, though, reduces the investments that could otherwise have improved worker compensation.

In 2008, the Task Force on Business Investment in Quebec, chaired by Professor Pierre Fortin and commissioned by the Quebec government, released its findings and it documents clearly this relationship. For example, two Oxford University researchers studied 23,000 companies in 10 industrialized countries. They found that, in the short term, 54 per cent of all corporate tax increases resulted in reduced salaries. Moreover, every $1 increase in corporate taxes led to long-term salary reductions of more than $1.

A 2009 study by a Federal Reserve Bank of Kansas City economist came to similar conclusions for the United States. Between 1977 and 1991, a one-per-cent increase in corporate taxes reduced salaries by 0.27 per cent, on average. Between 1992 and 2005, because of increased capital mobility and tax competition, the same one-per-cent increase in corporate taxes reduced salaries by 0.52 per cent, on average.

As investors, through RRSPs, TFSAs, or pension plans, employees want the best possible returns. High corporate taxes reduce the dividends businesses can pay out to shareholders, which include the banks and pension plans that invest workers’ savings. With weaker returns, workers will either need to work longer to reach their retiring goals or settle for less. Once again, it is the workers who shoulder the costs without even realizing it.

Increasing corporate taxes might hurt Canadian investors, but their capital is mobile. Workers do not have the same luxury and only stand to lose from policies. However, if the government sends an opposing signal by reducing the corporate tax burden, businesses will have more incentive to invest in Canada. An influx of capital would expand the fiscal pie, thereby partially compensating for lost revenue while accelerating economic growth, leading to higher salaries.

The emphasis on deficit elimination coming out of Ottawa must not strangle the Canadian economy by raising the individual and corporate tax burdens. It is only by limiting the growth of public spending, and by lowering taxes to a reasonable level, that we will be able to combine a balanced budget with sustainable economic recovery.