The Broadbent Blog


Don’t buy their numbers spin: corporations aren’t big tax contributors

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The Canadian Council of Chief Executives (CCCE) have published  a major report undertaken by PwC Canada to assess the contribution to Canadian public finances of  their members. The report is based on data provided by sixty three participating member companies representing 40% of  Council members.

Not to put too fine a point on it, the report is clearly intended to leave the impression that corporate Canada is heavily taxed and a major funder of government programs and services. It has been released in the wider context of studies questioning the effectiveness of deep cuts to corporate tax rates which have resulted in mounting piles of “dead money” accumulating on corporate balance sheets.

The headline number reported in the CCCE media release is that the sixty-six member companies made a superficially impressive “Total Tax Contribution” of $40.6 Billion in 2012.

However, it turns out that this big number includes $21.6 Billion in “Taxes Collected.”These include $14.1 Billion in personal income taxes and employee contributions to the Canada Pension Plan and Employment Insurance which are deducted from pay cheques and remitted to governments on behalf of employees.

These are, of course, conventionally and correctly regarded as personal rather than corporate taxes and have no impact on corporate after tax profits. If these taxes are raised, the increase is immediately passed on to employees.

The remaining $19.0 Billion or less than one half of the “Total Tax Contribution” is made up of “Taxes Borne” by companies. It is calculated and reported that “Taxes Borne” represent 33.4% of  pre tax profits.

However, several of the items included in this category are highly debatable and should not be seen as a levy on profits.

For example, this item includes the employer portion of Canada Pension Plan and Employment Insurance premiums, which most economists would agree are really borne by workers, at least in the medium to long run.

Property taxes are included even though they are arguably in large part a fee paid for services received analogous to paying for business inputs. For example, companies pay directly for trucks to move goods, but pay indirectly through taxes for the roads and bridges used by those trucks.

The “Taxes Borne” category also includes environmental charges, as if  corporations should be free to use clean air and water at no cost. In a similar vein, the report also details a variety of “other payments to government” such as natural resource royalties, as if use of  publicly owned mineral, forest and oil and gas resources by companies should be free of charge.

About one half ($9.8 Billion) of “Taxes Borne” represent corporate income taxes paid to the federal and provincial governments. While this sounds like a lot, the effective corporate income tax rate is low, just 17.5% of pre tax corporate profits for the sixty-six participating companies.

(Note that pre tax corporate profits and the effective corporate income tax rate can be calculated from data in the report, but the numbers are not directly provided.)

The effective corporate income tax rate of 17.5% is in line with the overall 2012 corporate average of 16.8% of operating profits as reported by Statistics Canada, but it is well below the combined statutory federal-provincial rate of 25% (averaged across provinces.)

The CCEE reports no trend over time. But the effective corporate income tax rate has been falling as the federal statutory corporate tax rate has been slashed in recent years, from 21% in 2007 to 15% in 2012.

As noted above, the"Total Tax Contribution” of corporations as calculated in the report includes $14.1 Billion in "people taxes" such as personal income taxes and worker premiums for CPP and EI which are collected from employees and remitted to the government.

The total of these "people taxes" paid by employees is 45% higher than the amount of corporate income tax paid by the companies employing those workers.

Additional analysis published in the report shows that 33.5% of the value created by the surveyed companies – after paying wages and salaries, and after paying taxes and other government charges - represents after tax profits which are paid out to shareholders or are retained within the company. A one third share of value-added almost certainly represents a healthy rate of return on capital.

All in all, notwithstanding the creative number crunching commissioned by the chief executives, it seems hard to argue that corporate taxes are much of a burden on the healthy profits of corporate Canada.

This article originally appeared in the Globe & Mail's Economy Lab.

Photo: aon. Used under a Creative Commons BY 2.0 licence.