Soak the Corporations, Then Give 'Em a Break

High corporate taxes, combined with targeted tax breaks, may be better than low taxes.

When you think about it, even America, that bastion of capitalism, is an extremely socialist state – from schools, to parks, to highways, and the myriad social payments to its citizens. Any centralized government authority or payment mechanism is, ultimately, socialism. Corporations in Canada are great consumers and beneficiaries of social transfers. Transportation infrastructure, subsidized education, job-training programs, universal health care, and the Canada Pension Plan represent some of the costs of doing business that Canadian corporations do not have to pay directly in wages and pensions, or costs of goods sold.

Low corporate taxes make businesses more competitive – but with whom and to whose benefit? Globalization means that to truly succeed, a business must be competitive anywhere and everywhere in the world simultaneously. Yet how does the global enterprise combine low hourly wages from Asia with high-quality workmanship from Switzerland for the sale of products to their market in the United States?

Economic theory tells us that corporate taxes are bad, but the same economic theory tells us that corporations will be or will become competitive or else they’ll die. If corporate taxes are higher for Company A than for Company B, all else being equal, Company A should go out of business. Reality and more considerate economic theory provide that all else is rarely equal and Company A can be competitive on many fronts other than tax expense or even total costs of production. It may be that higher corporate taxes actually foster innovation.

To the economic utopian – the defender of pure capitalism – the ideal would be that corporations pay zero tax to the government, but it would reasonably follow that the same economic utopian would also see the corporation receive zero benefit from the government. Amusingly, though, they don’t typically believe the latter, and often in the same sentence will demand lower corporate income tax rates with increased government expenditures on R&D. It may even be the case that our government gives more in services and benefits to corporations than they have ever paid for in taxes, so it’s possible that we may be better off as citizens if we eliminated the government-corporation relationship altogether. Ask for no taxes and provide no services – including their free ride on our roads.

But would we still regulate their activity, place limits on the volume of trees they might hew, demand safety precautions be employed in nuclear generation facilities, or ensure that their airplanes are safe? Any regulation has a cost burden to the corporation, so does it follow that we should provide some value in infrastructure and services to counteract those taxing costs. But then aren’t we back to where we started with corporate income taxes?

The good corporate citizen, that character created in management-consultant bedtime stories of lore, does actually exist – not by intention of the corporation but rather in spite of itself. Not all corporations are good citizens, but to be sure all corporations could become better citizens. But how?