Raising corporate taxes: who pays the toll?

By Stuart Thomson and Dan Barnes, Edmonton Journal June 13, 2015

EDMONTON - The debate about corporate tax rates was a hot issue during the Alberta provincial election campaign this year. It prompted the famous “math is difficult” moment between PC Leader Jim Prentice and NDP Leader Rachel Notley. In a pre-budget survey conducted by the government this spring, 69 per cent of Albertans said they wanted to see corporate taxes increased. The PC budget raised personal income taxes, hiked a variety of user fees, raised taxes on cigarettes and alcohol, and introduced a health levy. It left the corporations alone. The PCs warned during the election campaign that thousands of jobs would be lost if corporate taxes were raised. The NDP said the government needed money, called the Tories “irresponsible” for leaving the 10-per-cent corporate tax rate untouched and pledged to raised it to 12 per cent. But the debate, on both sides of the political spectrum, sounded nothing like the way economists talk about corporate taxes. The new NDP government’s budget is slated for the fall and the corporate tax issue will be both a political and economic challenge for Premier Rachel Notley and Finance Minister Joe Ceci. We look at some key issues in the debate and how economists view corporate tax policy. Will raising corporate taxes cost jobs? University of Calgary School of Public Policy economist Jack Mintz said Alberta would lose 8,900 jobs for each one-point increase in the corporate tax rate, a claim the PCs invoked on the campaign trail. The number emerged from a 2010 study by Mintz, a leading economist on corporate tax. Not all of his peers agree fully on the point. Laval University economist Stephen Gordon has written that corporate tax changes “do not materially affect total employment,” but might cause some short-term job losses. Mowat Centre chief economist Mike Moffatt in Toronto and UBC economist Kevin Milligan have perused Mintz’s study and don’t disparage the findings. “I think it holds up,” said Moffatt. “Overall that estimate might be on the high side but it’s not unreasonable. That said, 8,900 jobs in a province the size of Alberta, is fairly small. “The amount of jobs that (a tax increase) creates or loses is dwarfed by everything else that is going on in the economy. If oil goes up to $200 a barrel, Alberta could have a 20-per-cent corporate tax rate and is still going to be up a pile of jobs. So I think it’s important not to dwell too much on that 8,900 point because there are so many other things going on in the economy that are creating and losing jobs.” Proponents of a tax increase in Alberta point to B.C., where 37,000 jobs were added in the two years following a corporate tax hike from 10 to 11 per cent on April 1, 2013. Milligan didn’t dispute that raising the tax rate would cost jobs in the short term, but he said the number of jobs isn’t the focus. “It’s more, does this give us an economy with better jobs and higher-paying jobs?”

Politicians talk about jobs a lot but economists are less concerned with head counts and more concerned about the quality of the job. “What is more important is the incomes and the productivity of the workers,” said Milligan. Canada has a similar unemployment rate to Nigeria, but a GDP per capita that’s nearly 20 times higher. Wealthy corporations can afford the increase If you tax a company’s profits, someone must pay the bill, and it’s not necessarily the corporation. “Most serious economists find that corporations don’t pay income tax,” said Philip Cross, former chief economic analyst at Statistics Canada. “At the end of the day, taxes come out of some human being’s hide, and the corporate income tax is going to come out of the hide of one of three people.” It could be shareholders who see lower profits, workers whose wages are cut, or consumers who pay higher prices for goods and services. “Two of those three are not going to be good for the average guy on the street,” said Cross, now a senior fellow with the Macdonald-Laurier Institute in Ottawa. “So this idea that we’ll just pass taxes on to corporations and we the average person will just dance away from this unhurt isn’t born out. In fact, most studies show the brunt of corporate income taxes are paid through lower wages.” A study of European companies conducted by Oxford University found that a $1 rise in corporate tax reduced the wage bill by 75 cents. Some of the burden, especially in the short-term, will be borne by shareholders. The largest shareholder in this country is the Canada Pension Plan Investment Board. Companies won’t leave Alberta, because that’s where the oil is It’s true, the oil in the ground isn’t going anywhere, but oil companies make calculations based on the probability of making a profit. The companies will throw expenses and the potential profit into a spreadsheet and decide how much exploration they can do. If the corporate-tax rate changes, they move the cut-off line, said Milligan. “It’s not going to lead to all companies leaving. It’s rarely like that,” he said. “They’ll cut back on some marginal projects and that’s going to happen with a 12-per-cent rate as opposed to a 10-per-cent rate.” The tax rate is just one consideration for an investment, and not the most important, said Moffatt. “If I’m making a long-term investment in the province, deciding whether or not to do so, sure I’m looking at the corporate tax rate, but I’m looking at a million and one other things, including the price of oil, the price of real estate, the value of the Canadian dollar, and so on. “In most deals it’s not going to be the corporate tax rate that makes or breaks it.” Corporations need to pay their fair share The concept of fairness is where economists, and just about everyone else, disagree. One thing economists do generally agree on is that if you’re looking to raise revenue — to address income inequality or a yawning provincial deficit or just to foot the spending bill — corporate taxes aren’t a great way to do it.

Mintz expected the government to pull in about $300 to $400 million in revenue for each one-point increase. “Raising corporate taxes might not raise as much revenue as you might think, because companies have a lot of opportunities to shift profits between provinces,” said Moffatt. “Alberta has actually been a bit of a beneficiary of that. At 10 per cent they are lower than everybody else in Canada, so it made it attractive to companies that operated across Canada to book a little bit more of their profits in Alberta.” In the wake of a corporate tax hike, companies may invest less. If wages also go down following a tax increase, the government can expect to make less in personal income tax. “I don’t know for sure who’s bearing (the corporate) tax, it has an impact on future growth and I’m not sure that it actually gets much revenue,” said Milligan. “I just see fairness being much easier to directly address on the personal tax side than the corporate tax side.” Why do politicians and economists differ? Premier Rachel Notley has already made the point that this is not just an economic debate. “Ultimately all these questions of taxes are political questions, with obvious economic impacts. My sense is that Notley understands that she has to go slow here,” said Bob Ascah, a fellow at the University of Alberta’s Institute for Public Economics. “It is trying to find a balance, and Notley picks up what (former Premier Peter) Lougheed emphasized — that oil and gas resources belong to the people,” he said. “And their extraction does produce investment and jobs, but there has to be a return to the public.” The biggest difference in the way economists and politicians talk about corporate taxes is toned-down language. The PCs talked about job losses and warned that oil companies would pack up and leave if the corporate tax rate rises. The NDP suggested corporations were getting off scot-free and Alberta badly needs the revenue from a higher tax rate. Economists consider revenue, job losses and higher retail prices, and do not favour a corporate tax hike as a means of erasing a budget deficit. “If I’m the Alberta government and I’m trying to reduce the deficit, this is probably not the tax lever I use because it doesn’t raise a lot of revenue, and it does have some nasty side effects,” said Moffatt. “Overall, the impact to the Alberta economy is overblown by some who oppose the move. It’s not going to be quite as devastating as some say, but it certainly is going to have a small negative effect.” Milligan wrote during the election campaign that the proposed increase should be put in a national context. “We also need a sense of proportion. It is not out of line with other provinces.” In fact, at 12 per cent, it would be the median rate. sxthomson@edmontonjournal.com Profit-shifting 101 Companies, like most people, hate paying taxes. When Alberta’s NDP government raises the corporate tax rate from 10 to 12 per cent, there will likely be an army of accountants looking for ways around it.