House Call with Carol Hughes

It’s time for corporate Canada to earn their tax breaks

It’s an established economic principle that people respond to incentives such as a reward for good behaviour or punishment for bad behaviour. Most people understand this on an innate level without ever looking at the studies that back this up. An example of this is the classic carrot or the stick motivators that parents use to modify the behaviour of children. It’s no surprise that governments use these same motivators to coerce the population to do things like file taxes (stick) or make their homes more energy efficient (carrot). Where use of this idea tends to be abandoned is when governments pursue measures based on dogmatic belief and ignore empirical evidence.

An example of that took place on January 7 of this year. That was the day that corporate Canada had, on average, completed paying their taxes (for the year!) and started accumulating wealth. The theory behind such a woefully small contribution to the public coffers argues that a low tax rate will allow corporations to re-invest in their businesses’ machinery and equipment and even employ more people. This is the trickle-down economics theory that has been ham-stringing western economies since its ascension.

Corporate Canada has enjoyed multiple tax cuts for two decades and the rate they are charged has been cut in half over that period. When examining the outcome of those measures over the same time, it’s clear that the tax breaks are not performing as anticipated. Instead of investing more in machinery and equipment, these businesses are hoarding their returns. In fact, investment in those areas has been cut in half over the same period that taxes have gone down.

These are global examples for all of corporate Canada and there will always be outliers—some companies do invest in their capacity at a much higher rate and there are those that don’t at all. But best and worst case examples are not what government policy should be developed upon. That’s why studying the rate of investment as a share of the Gross Domestic Product (GDP) offers the best window into the performance of tax incentives. When judged that way, corporate tax cuts are not performing.

The Fraser Institute, a right-wing think tank, reminds us yearly about tax-freedom day for individuals. They use the individual tax burden as a rallying cry call for tax breaks, but their campaign is disingenuous, and they say nothing about the disproportionate burden placed on individuals as compared to corporations. The silence is deafening, and it shows us all we need to know about the Fraser Institute.

Throughout the decades of corporate tax relief another trend has been growing—inequality. As the rich get richer, there is less for everyone else. Even the managing director of the International Monetary Fund has stated it’s time to properly tax the rich. This is the same organization that prescribed austerity budgets for decades, which makes the call all the more surprising.

The truth is we need taxes—perhaps now more than ever given the significant increase in catastrophic weather events—but the wrong people are carrying most of the freight. There is room to encourage corporations to earn tax breaks by investing in the way that had been hoped for when low rates were handed to them without strings. Most other tax incentives are conditional. It’s time to apply that idea to all of them. Without that, inequality will continue to grow, and the cost will become the services and programs most people rely on. Nobody complains about tax bills when the fire truck shows up to save their house. Keep that in mind the next time a politician starts promising tax cuts.