Should Corporations Pay More Tax?

As we learned yesterday, Canada has been lowering the income tax rate for corporations for many years.

However, this hasn’t had a big impact on how much revenue the government receives. The graphs we looked at show Canadian government revenue continuing to climb steeply, apart from years that follow a global financial crisis.

So why hasn’t the decrease in corporate income tax affected the overall amount of revenue received by the government?

It turns out that corporate income tax is simply not that big a source of revenue for the Canadian government. Here is a graph showing the percentage of the total revenue that the federal government has received from corporate income tax every year. As with yesterday's graph, there is a gap in the Statistics Canada data from 1976 to 1988. I have filled it in with a straight line, just to show the trend, but no doubt the actual line during these years would have been as uneven as in the other periods.

You can see that corporate income tax has only contributed more than 30% of government revenues on one occasion, during WWII. It has contributed less than 20% since around 1970. There was even a brief dip below 10% in the early 1990s.

Where did the rest of the money to run our government come from?

Taxing Individuals

Most of it came from individuals. Let’s look at 2009 for a detailed example (see the table below). Of all the federal government’s revenue in 2009, almost 72% came from individuals. This consisted of personal income tax (47%), sales tax (17.5%), individual contributions to the Canada Pension Plan and employment insurance (about 4%), and taxes on non-residents (3%).

About 6% of government revenue came investment income (for instance, the large investments behind the CPP) and about 4% from selling goods and services through crown corporations (think of advertising revenue received by CBC Television, collectible coins issued by the Royal Canadian Mint, train fares received by Via Rail, and premiums paid by banks to the Canadian Deposit Insurance Corporation).

The rest, about 18%, came from regular corporations, and some of that, about 5%, consisted of corporate contributions to CPP and EI.

This means that only 13% of government revenues came from corporate income tax.

Breakdown of Canadian federal government revenues for 2009

Breakdown of Canadian federal government revenues for 2009

Reducing corporate income tax rates, therefore, simply doesn’t have a dramatic effect on total government revenue. And increasing those rates would not raise government revenues. At least, not in the long run.

The reason for this is that Canada operates in the context of the taxation policies of other countries. Corporations are not citizens. They can move their business to a country where tax rates are lower. As we saw with Apple, they don’t even have to move their actual business activities, they just have to move their legal office. Canadian corporate tax rates therefore tend to align with what other countries are doing, for fear of capital fleeing the country.

Is this fair?

Since most countries around the world have been reducing corporate tax rates over the past few decades, Canada has followed suit. Canada’s revenue from corporate income tax is therefore relatively small, and is likely to remain small.

Is this fair? Is it okay for corporations to pay so little tax when individuals pay so much?

Maybe not. But let’s be careful what we wish for. If corporations paid a larger share of the tax bill, they would almost certainly demand and be given an even bigger say in government policy. That’s not something I, for one, would like to see.

Coming Up: A Practical Example

In my next series of articles, I’ll be looking at one Canadian company to see how it has dealt with corporate income tax. We’ll need to look at its cash flows, but we’ve already learned about that. So, we should be ready to go!

Further Reading

To learn more about how all the pieces of Canada’s tax policy fits together, have a look at the Canadian Tax Foundation’s excellent book,  Tax Policy in Canada. You can download the first chapter here.

The data underlying the graph comes from the same Stats Can data I used yesterday: Series H1-18 (1867 to 1975) and Table 385-0001 (1989 to 2009).

Photo of a shipbuilding crane and the "Armadillo" cultural venue in Glasgow, taken in 2012. It's actually supposed to represent a set of interlocking ship hulls, not an armadillo. It is a tribute to the shipbuilding heritage of Glasgow. Although the above article uses Canada as its example, this huge crane next to a city-owned cultural centre seem like a fitting image of what corporations can contribute to our history and our culture.