Skinning the Cat.

It is particularly Canadian that a key issue in the never-ending election is corporate taxes.  In this morning’s Globe and Mail, an article, On Corporate Tax Cuts, There Are Many Ways to Skin a Cat (http://www.theglobeandmail.com/report-on-business/top-business-stories/on-corporate-tax-cuts-there-are-many-ways-to-skin-a-cat/article1974458/) debates the pros and cons of a low or no tax on corporate profits.  The argument is that a corporation with a low tax rate will either result in lower prices to consumers (unlikely), more investment within the corporation (more likely) resulting in growth and employment or distribution of excess cash in the forms of dividens making capital more fungible (least likely). 

I was once an advocate of no taxation for corporations.  This was based on the assumption that consumers paid the tax through commodity prices.  This would allow the corporation to make business decisions purely on business or economic principles and not on tax grounds.  It would result in gross simplicity of filing corporate tax returns—there wouldn’t be any.  Lower prices would mean greater profits at the consumption end of the pipe thereby recouping lost corporate taxes.  Greater growth would fuel greater employment thereby generating greater tax deductions on wages.  Really, a zero sum game.

I have, however, and with age, come away from that position.  My position assumes that the corporation is a transparent vehicle through which incomes and expenses flowed freely.  Excess capital was deployed in pursuits that resulted in economic gains.  Capital was fungible—that is capital liberated from one corporation would flow into another therefore rewarding efficiency and market performance.  Yes, in a perfect world that is true.  It is equally not true in an imperfect world.

In the modern and postmodern era corporations have taken on their own separate identity.  They are not a flow through of economic activity.  They have, in fact, taken on much of the characteristics of a corporate person.  They commit and are charged and convicted of crimes.  They engage in activities that do not, necessarily, increase corporate value.  Corporations have the same economic self interest as a natural person and, as such, should pay their way for services that they consume.

That rate becomes the question.  There appears to be a race to the bottom with many countries competing to see how low they can go.  Any advantage is short lived as rates in other countries meet the reduced rate or go lower.  The result is that, in a world where there is massive sovereign debt to repay, lowering taxes in any sector goes from irresponsible to reckless.  Now is not the time to engage in economic theory.

The real question, an one which I will post on shortly, is the most effective tax on income.  I am a great believer on consumption taxes versus income taxes but that, as I say, is for another post.