The Legend of Zero

The corporate tax debate is ratcheting up to a new level among some opinion-makers: Since lower corporate taxes increase economic growth, why not cut them to zero? After all, economy theory has it that corporations don’t pay taxes anyway. They only pass on the costs, in the form of higher prices, lower wages, or smaller dividends.

Call it the legend of zero. I tackle it in a PEF blog here, and will be writing more about it in the coming days.

Here’s the skinny

* Since the costs of corporate taxes are already fully imbedded in the flow-throughs, who benefits when corporate taxes disappear? Will prices fall? Will wages go up? Or will it all go to the shareholders?

* Corporations paid $30 billion to the federal treasury alone in 2009-10. To make up for this loss, GST would have to go up by 5 percentage points. Ontario residents would be paying 18% on most purchases just to hang on to the inadequate service levels they’ve already got. Insert sound of choking…. and more crumbling infrastructure, and lower public service levels.

* Corporations are not people, but they have legal rights, just like people. They are protected by the rule of law and a justice system. Their interests are represented at every public decision-making table in the country. Corporations benefit from public policy, public institutions and public services, without which profits would be far, far lower.

So, of course, they should pay no taxes.

Payment for benefits received is kind of the way a market economy works. The “something for nothing” argument flies in the face of the fundamental principles of capitalism. And if corporations don’t defend its principles, who do they think will?

3 comments

  1. The usual argument against corporate taxes is that they will simply pass along the cost to consumers. Unless the corporation in question has monopoly power, this is nonsense. Price is determined by many factors, but not, with the exception of market power which needs to be regulated, by corporate fiat. Corporate taxes are borne by corporate owners — by shareholders — whether in the form of reduced dividends or retained earnings. Given that corporate balance sheets are in much better shape than household ones, it is difficult to imagine any reasonable argument against corporate taxation except for plain old-fashioned greed.

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