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In a panel held over a year ago in Melbourne, I heard Jim Flaherty and Joe Hockey, respectively Canada’s and Australia’s Finance Ministers, argue that multinational profit shifting is unfair. With companies shifting profits to tax havens, governments have to rely on taxes paid by people.

Tax avoidance through international profit shifting is not a general problem

Of course, all this begs the question as to why we levy a corporate tax in the first place. Corporations are paper entities established by law and therefore do not pay tax. People do. As another form of cost, the corporate tax is shifted in its incidence by raising consumer prices, reducing negotiated wages or distributing less profit to which a majority of owners are financial institutions and pension plans. Generally, the corporate tax is a regressive tax by hurting proportionately more immobile populations.

The technical argument for a corporate tax is to shore up the personal tax since people can avoid paying the levy by leaving income in untaxed corporations. Further, the corporate tax is a method to capture some of the profits generated by public spending, such as infrastructure that directly benefits businesses.

However, the real reason for pushing for higher corporate taxes is that it is politically popular: People think that corporations should be taxed, not understanding the consequences to consumer prices, investment and worker incomes, a point typically made by economists.

As seen with polling in Alberta, ask the broad question as to whether corporate tax or oil and gas royalties should be raised and, duh, you get the majority saying “yes.” Politics, however, sometimes don’t make good policy, especially in a province now facing a major downturn in investment. The consequences of bad public policy is felt later when people can’t get a job, as indicated by CNRL holding back investment in Alberta.