Life in Canada

Corporate income taxes (CIT) have been in the political spotlight recently, but many may find it difficult to see how it affects their lives in the way that they understand how they pay personal income taxes and the GST. This lack of transparency common to Canada, is fertile ground for any number of misunderstandings and makeshift theorizing, so the question I’m going to address here is: who pays the CIT?

Not corporations: Corporations don’t pay the tax, for the simple reason that corporations are not people. Nor does it make sense to appeal to the cause of social justice by referring to ‘rich corporations.’ Corporations may be big, and they may be profitable, but they cannot be wealthy: they are a form of wealth. Claiming that ‘wealthy corporations’ pay the CIT makes about as much sense as claiming that ‘rich buildings’ pay property taxes.

Not corporate executives: They get paid before the government does: Corporate taxes are levied on profits after salaries are paid out.

Not shareholders: The short-run effect of an increase in the CIT will reduce a firm’s profitability and share prices, but in the long run – which is the horizon that matters when discussing tax policy – the answer is very different. In a dynamic, open economy with access to highly flexible capital markets – in other words, a country such as Canada – savers can respond to higher corporate income taxes by shifting investment to other jurisdictions. If the country is small enough to not affect the world rate of return – Canada, again – then investors will always receive the world rate of return, regardless of the CIT rate in force.

If corporations, their executives and their owners don’t pay the CIT, then that leaves…Yes you got it...

Workers and consumers: Reduced investment results in reduced productive capacity, which in turn leads to reduced output and weaker labour demand. Reduced supply could increase prices (another way of putting this is that producers could pass the CIT on to consumers), but there doesn’t appear to be much evidence for this effect; it is possible that foreign competition makes it difficult for firms to raise prices.

Since the CIT isn’t a policy that affects total employment (see this earlier Economy Lab post), the effect of an increase of the CIT is to reduce wages. On this point, available evidence suggests that the lion’s share of the corporate tax burden is borne by workers.

Many people may feel that the current public debate on the corporate income tax doesn’t affect them. But one of the lessons of the economics of tax incidence is that the people who really pay the tax are not always those who send cheques to the Receiver-General. In this case, it is workers who end up paying corporate taxes.


I forecast: Tax man to hit Canadian workers harder in 2011