Recently there has been a lot of press on the issue of corporate taxation. Many US corporations are engaging in "inversion" transactions where they merge with a company in a low-no tax jurisdiction. Billions of dollars of taxable revenues are shifted out of the United States to, say, Ireland (the current flavour of low-no tax jurisdictions. There is no doubt that the US Inland Revenue Service (IRS) is going after such transactions. The amount of tax revenue from corporations continues to fall both in the US and Canada. In the US it is mainly because of either significant tax subsidies (e.g. depreciation, reserves for extractive industries such as oil and gas) or because the world has flattened significantly and corporations can (like the rest of us) choose where it wants to be domiciled.
Other than wages and raw materials, taxation is the highest expenditure that a corporation will make. Wages are deductible in computing the income of the corporation but wage earners suffer immediate taxation by way of payroll deductions. Since accounting for such corporations are done on an accrual basis corporations pay tax on income that is not yet earned (e.g. accounts receivable). Because business is driven to optimize expenditures, expenditures on taxation are no less managed than are, say, the purchase of a machine or raw materials. Shareholders would hold management to account if tax dollars were squandered. So business will continue to optimize its tax status. As do individuals.
Canada is in the forefront of optimizing its corporate tax regime. It has significantly lowered corporate taxes on small business (about 15%) and larger business (25%) as compared to 35%+ in the United States. Distributions to shareholders are favoured in Canada through a dividend tax credit so that the shareholder is reimbursed for some if not all of the taxes paid by the corporation. In the US there is an element of double taxation--once at the corporate level and once when dividends are distributed.
There is a case to be made that corporations should pay no tax at all. This would stop tax jurisdiction shopping and would center the corporation's activities in locations without regard to taxation. In the US where repatriation of foreign profits is taxed at about 35% (on top of whatever tax is paid in the foreign jurisdiction) corporations hold trillions of dollars outside the country--to the detriment of the domestic economy. Any tax shortfall would be made up of taxes on dividends, wages, and economic activity that produces jobs. Less dependency is required from banks. Less need for wasteful tax subsidies to corporations. This would result in a significantly reducing the complexity of tax legislation.
That leaves us with the conundrum of what governments do about the general tax base. In theory, progressive taxation places higher taxes on the rich. In practice, this is hardly the case. Also, the utility value of a dollar to a poor man is more than to a rich man. Because much of the wealth of the rich gives rise to capital gains, their collective tax rate is about half of the general tax rate. Why capital gains should attract a lower rate of tax is somewhat mystifying.
I have long been a proponent of consumption taxes--such as VAT in Europe and GST-HST in Canada. The rich spend more than the poor and therefore the tax is somewhat progressive. A consumption tax is hard to beat and, while it may not eliminate the underground economy it will put a significant dent in it. In Canada we have gone the wrong way by reducing our consumption tax. We should have increased it and reduced our income taxes. For poor the tax system can refund some of the consumption taxes paid by way of an earned tax credit. The need for filing a tax return would vanish and tax collections would rise dramatically. I believe that such a regime might be instituted--not by the Conservative government of the day--but by other cooler heads.
