It is typically the case that those who advocate increasing corporate taxes intend for them to be paid by the owners of capital. The analysis goes as follows: Corporate taxes are applied to profits, and since profits are distributed to their owners, corporate taxes are borne by capitalists.

But that’s far from being the end of the story, at least, not in a small open economy such as Canada. The rate of return on investment is determined by the world supply of savings and the world demand for capital, and since Canada has only a small share of the world capital markets, what happens here has essentially no effect on that world rate of return. If an investment project in Canada can’t generate that rate of return, there are any number of others that can.

Suppose that world rate of return in 9% a year (I’m picking a number out of the air here so that the math works out nicely), and that the Canadian corporate income tax rate is 40%. Investors would therefore require that a Canadian corporation generate a pre-tax profit rate of 15%, so that the after-tax return is 9%. Now suppose that the tax rate goes to 50%. Since investors can always get a 9% rate of return on the world market, the only way a Canadian investment project can survive is if it generates pre-tax profits at a rate of 18%, so that the after-tax rate matches the world rate. If it can’t, investors will simply shut it down and move their capital elsewhere.

So how can firms increase their pre-tax profit rates? They can

- raise prices in order to pass the tax increase onto consumers, or
- cut costs (notably wages and/or employment), or
- both.

So who pays for corporate taxes? Not owners of capital, even if they were the original target – they still get the world rate of return. The people who really pay are consumers and workers.

Edited to add: This is part of my Growing Public campaign.

[ 29 July 2005: Message edited by: Stephen Gordon ]

edited to add:

I'm not disputing the goal of redistribution from rich to poor. I'm saying that corporate income taxes don't do the job, and that they are more likely to be regressive than progressive.

[ 29 July 2005: Message edited by: Stephen Gordon ]

quote:

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I'm not disputing the goal of redistribution from rich to poor. I'm saying that corporate income taxes don't do the job, and that they are more likely to be regressive than progressive.

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Originally posted by Stephen Gordon:
Suppose that world rate of return in 9% a year (I’m picking a number out of the air here so that the math works out nicely), and that the Canadian corporate income tax rate is 40%. Investors would therefore require that a Canadian corporation generate a pre-tax profit rate of 15%, so that the after-tax return is 9%. Now suppose that the tax rate goes to 50%. Since investors can always get a 9% rate of return on the world market, the only way a Canadian investment project can survive is if it generates pre-tax profits at a rate of 18%, so that the after-tax rate matches the world rate. If it can’t, investors will simply shut it down and move their capital elsewhere.

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Corporate profits are sheltered by umbrella protection of family trusts prevalent in Canada and exist also in the U.S. where tax rates are 25-30% base rate. But these taxes don't have to be paid unless the assets are removed from the trust and or taken outside the country to be invested elsewhere. In theory, only personal income out of these trusts is taxed for the individuals who own them. But it's a good bet that all of their living expenses are covered as corporate expenses and never see the light of day. These are Canada's royal families. Such tax shelters introduced during the Mulroney era, and left unscathed by the Liberals, are supposed to encourage Canada's oligarchs to invest in the economy and create jobs. I think it costs us too much already just to keep the jobs we have. Workers in North America are losing ground everyday.

Holland, France and Norway have high corporate tax rates, and their economies have grown at better rates than Cyprus with it's bottom of the barrel 10 percent or so. What if a group of rich trading nations sat down and hammered out a minimum corporate tax rate or a scalable tax rate to accommodate small and medium sized domestic business ?. Multinationals might think of it as a cover charge to keep out the riff raff. Big business could absorb the Would multinationals then flock to Honduras or Kenya in a huff ?.

I mean, at some point we're bargaining from the position of slavery when we can't work anymore hours in a week for a roof over our heads and food on the table with one of the lowest savings rates in Canada compared to richest nations.

[ 30 July 2005: Message edited by: Fidel ]

If the corporate income tax was truly at all times never paid by the owners of capital, then corporations should have no concern about the corporate income tax, because what you have not taken into account is the price elasticity of the thing or service sold.

The fact that they do vociferously oppose the corporate income tax suggests that they do indeed worry that the tax takes a bite out of the retained earnings of the corporation rather than the dividend payouts or being passed on to consumers.

quote:

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Originally posted by Stephen Gordon:
So how can firms increase their pre-tax profit rates? They can

- raise prices in order to pass the tax increase onto consumers, or
- cut costs (notably wages and/or employment), or
- both.

So who pays for corporate taxes? Not owners of capital, even if they were the original target – they still get the world rate of return. The people who really pay are consumers and workers.

---

Stephen, are you employed by the Federal Finance Dept, ... or maybe the BC Min of Finance??? This sounds like the kind of "Friedman Lite" material I would expect in one of their treatises. Not that there aren't some very bright people in both departments, there certainly are, rather, I am talking about some of the more bumpf related material they pump out from time to time.

Your first point above, raise prices, assumes that in a world of 2% inflation that businesses can arbitrarily raise prices without any decline in sales. That's clearly not the case with growing competition from China and India across the whole panoply of consumer goods.

Your second point assumes that business need not respect collective agreements, or even have to pay market wages and prices for their inputs. What kind of business are you thinking of, it sounds like a licence to print money. (Must be cable TV franchises!)

Both arguments are right, but only to some extent. When corporate costs (taxes or other) go up, they will pass on some, but not all of the increase to individuals, either in the form of price increases or pay decreases. Some of the increase they'll eat as decreased profit, simply because of the elasticity of prices and wages, as others have said. And the same goes for individuals: if they can't get higher wages or work longer hours, they will spend somewhat less, but they'll also save or invest less.

The biggest difference between the two arguments is that capital can pick up and move to a lower tax jurisdiction with relative ease, whereas most individuals find it hard to do so.

quote:

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Originally posted by Stephen Gordon:

So how can firms increase their pre-tax profit rates? They can

- raise prices in order to pass the tax increase onto consumers, or
- cut costs (notably wages and/or employment), or
- both.

So who pays for corporate taxes? Not owners of capital, even if they were the original target – they still get the world rate of return. The people who really pay are consumers and workers.
]

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Your argument that corporations can raise prices to fight taxation is flawed: if it were possible to increase profits by simply increasing prices, all corporations would immediately do it ANYWAY, regardless of what the taxation rate is.

Corporations generally don't just raise prices or cut costs dramatically anytime they like just to mitigate the effects of taxation. Due to the competition they face or the elasticities of their products, it may actually be unprofitable to do so.

The fact remains, however, that the ownership of the means of production by an elite few have serious consequences for the well-being of working people. I could only wish that the NDP would start talking about social ownership and workers' control as an answer to capital flight, taxation avoidance and the inequality that exists in the marketplace.

Corporate taxation can only do so much.

[ 31 July 2005: Message edited by: Sean Cain ]

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Originally posted by Sean Cain:
I could only wish that the NDP would start talking about social ownership and workers' control as an answer to capital flight, taxation avoidance and the inequality that exists in the marketplace.

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We have no choice but to realize just how natural their version of free market really is. It's so natural that it must be enforced with the world's highest levels of military spending in similar proportions that propped-up British colonialism. Times of peace and prosperity and quelling worker's dissent should be paid for by taxpayers themselves. As long as the people worship infront of that temple, we can only bleat and chew grass in protest.

[ 31 July 2005: Message edited by: Fidel ]

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Originally posted by Fidel:
We have no choice but to realize just how natural their version of free market really is. It's so natural that it must be enforced with the world's highest levels of military spending...

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Originally posted by Lard tunderin' jeesus:
They're the only possible way of taxing foreign ownership. Are you advocating protectionism and the elimination of foreign investment?

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Originally posted by DrConway:
The fact that they do vociferously oppose the corporate income tax suggests that they do indeed worry that the tax takes a bite out of the retained earnings of the corporation rather than the dividend payouts or being passed on to consumers.

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Furthermore, demand conditions being a primary determinant of corporate investment, the corporate income tax may affect dividend pay-outs but not the pre-tax rate of capital formation. This is borne-out by the nearly constant net capital formation in the United States over 40 years as the corporate tax rate has gone from around 45% to 30% while the rate of capital formation has been a nice flat 10% of GDP over 40 years.

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There have been too many things happening in the US macro economy over the past 50 years to make that kind of conclusion. You could just as easily say that things would have been better if they'd had lower corporate taxes.

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Originally posted by MasterDebator:

Stephen, are you employed by the Federal Finance Dept, ... or maybe the BC Min of Finance??? This sounds like the kind of "Friedman Lite" material I would expect in one of their treatises. Not that there aren't some very bright people in both departments, there certainly are, rather, I am talking about some of the more bumpf related material they pump out from time to time.

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No, but some of my former students work there. This is standard economics and one of my goals here on babble is to make it better known.

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Your first point above, raise prices, assumes that in a world of 2% inflation that businesses can arbitrarily raise prices without any decline in sales. That's clearly not the case with growing competition from China and India across the whole panoply of consumer goods.

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I agree: in practice, the 'passing on the cost' option requires more market power than most firms actually have. But it's still a theoretical possibility.

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Your second point assumes that business need not respect collective agreements, or even have to pay market wages and prices for their inputs. What kind of business are you thinking of, it sounds like a licence to print money. (Must be cable TV franchises!)

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Shutting down a business isn't necessarily costless: separation payments are only one thing to consider. But if investors can make more money by shutting it down and starting over elsewhere, they'll do it.

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Corporate income taxes will indeed be paid for the most part by companies and/or their shareholders. If that results in an unsatisfactory rate of return, there may be other consequences in terms of reduced investment or plant closures. However, the notion that the incidence of the tax is not on capital and it's owners is probably wrong, for the most part.

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That claim isn't unsupported by an analysis, theoretical or empirical.

[ 31 July 2005: Message edited by: Stephen Gordon ]

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So who pays for corporate taxes? Not owners of capital, even if they were the original target – they still get the world rate of return.

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This is a sweeping claim that make investors seem like omniscient, rational actors who are interested in only returns and who can accurately predict them.
I could spend a lot of time poking holes in this assessment but I'll just say, 'dot-com, anyone?'.

To the extent that your assertion is true (and certainly the corporate tax rate is
one factor in a corporations deciding where to locate), it only serves to reinforce the notion of a race to the bottom.

Let's accept for a moment, that what you say is true and (reading through your links), Sweden finances its welfare state as you suggest, through labour taxes and consumption taxes. Why don't all the countries just lower the corporate taxes and live happily ever after?

Well, first, as soon as you raise employment and consumption taxes, people start to scream that you're providing a disincentive to spend locally (and an incentive to smuggle) and an incentive for the "best and brightest" to move elsewhere. Mobile enterprises like software companies, they will argue, will relocate to lower tax countries.

Second, as soon as everyone lowers capital taxes, that rate becomes the norm and Sweden loses its competitive advantage. In order to compete for capital, Sweden now has to compromise in some other way (other taxes, wages, labour standards, etc).

Is logical reasoning a core competency for economists?

As far as I can tell, the only alternatives to the race to the bottom are a re-emergence of protectionism or some form of
world federalism.

[ 31 July 2005: Message edited by: ReeferMadness ]

quote:

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quote: Originally posted by MasterDebator:

Stephen, are you employed by the Federal Finance Dept, ... or maybe the BC Min of Finance??? This sounds like the kind of "Friedman Lite" material I would expect in one of their treatises. Not that there aren't some very bright people in both departments, there certainly are, rather, I am talking about some of the more bumpf related material they pump out from time to time.

No, but some of my former students work there. This is standard economics and one of my goals here on babble is to make it better known.

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quote:

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Originally posted by Sean Cain:
The fact remains, however, that the ownership of the means of production by an elite few have serious consequences for the well-being of working people. I could only wish that the NDP would start talking about social ownership and workers' control as an answer to capital flight, taxation avoidance and the inequality that exists in the marketplace.

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No - but why do we want to tax foreign ownership?

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Originally posted by Stephen Gordon:

I posed the question in good faith. Foreign corporations who invest in Canada increase the demand for Canadian workers, which increases wages and/or employment. IMV, That's not an activity that should be punished.

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Corporations don't invest in Canada because they want to make life better for us, they do so in order to make more money for themselves. Foreign investment plays a large role in our standard of living, but so do government restrictions (ie AutoPact) designed to ensure that as many people as possible benefit from the investment as possible.

In addition, when your economy is controlled by foreign investors, the decisions they make often do not factor in the interests of your own citizens. If a foreign-owned pulp and paper plant in Flin Flon, Manitoba, for instance, closes down because the company deems it unprofitable, do they consider the impact that it would have on the community, through lost jobs, less people spending money, less demands for goods, etc? Would the company even bother trying to help the community adjust to the new conditions if this paper mill could not be maintained?

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No - but why do we want to tax foreign ownership?

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Simply because Canada taxes Canadian ownership. Not taxing foreign ownership means that you're discriminating against Canadian investors.

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From: A Noose, not a bracelet:
Ten years later, 70 percent of Nigerians still live on less than $1 a day and Shell is still making superprofits. Equatorial Guinea, which has a major oil deal with ExxonMobil, "got to keep a mere 12 percent of the oil revenues in the first year of its contract," according to a 60 Minutes report--a share so low it would have been scandalous even at the height of colonial oil pillage.

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African's will experience indirect benefits of the "free market economic long run" when they realize that their ancestors made the mistake of settling on land that should later belong to predatory capitalists. Colonialism must go, and the African people need revolution before they achieve social justice. The struggle for real democracy continues in mineral and oil-rich Angola where the cold war was also waged. Angola should be among Africa's richest nations. Angola's most successful domestic industry is, sadly, aritificial limbs.

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Originally posted by abnormal:

Of course, the logical answer would be to say "let's not tax any ownership" but somehow I don't think that would fly.

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According to Mel Hurtig, Canada ranked 30th out of 45 high technology exporting nations in 2001 when those exports are measured as a percentage of GDP. He says the only reason Canada doesn't sink entirely off the list of rich nation spending on R&D is due to taxpayer investment.

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Originally posted by Aristotleded24:

Corporations don't invest in Canada because they want to make life better for us, they do so in order to make more money for themselves.

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You do know how to make an economist happy, don't you?

quote:

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In addition, when your economy is controlled by foreign investors, the decisions they make often do not factor in the interests of your own citizens. If a foreign-owned pulp and paper plant in Flin Flon, Manitoba, for instance, closes down because the company deems it unprofitable, do they consider the impact that it would have on the community, through lost jobs, less people spending money, less demanheds for goods, etc? Would the company even bother trying to help the community adjust to the new conditions if this paper mill could not be maintained?

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It's unlikely a (say) Toronto-based firm would behave any differently, isn't it?

As for the broader point about foreign control, for a country such as Canada, that amounts to getting macro policy right - and to a large extent, we've succeeded. These days, Canadians are accumulating US assets (here and in the US).

[ 01 August 2005: Message edited by: Stephen Gordon ]

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originally posted by Fidel:
the only reason Canada doesn't sink entirely off the list of rich nation spending on R&D is due to taxpayer investment.

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I assume that by taxpayer investment you mean governmental involvement. It'd be nice if the private sector wanted to invest as well.

quote:

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Originally posted by Stephen Gordon:
Foreign corporations who invest in Canada increase the demand for Canadian workers, which increases wages and/or employment. IMV, That's not an activity that should be punished.

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You do know how to make an economist happy, don't you?

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You know I'm right, corporations are more concerned about their bottom line than anything else.

I can give you an example. A major employer here in Brandon is Maple Leaf Meats, a large pig processing plant. Wages start somewhere above $9/hour, and there are many incentives for attendance, punctuality, productivity, etc. Now, this plant has a problem with employee turnover. Do you want to be cutting pigs throats for 8 hours a day, 5 days a week, for wages not in the double-digits? But I digress. Now, say Maple Leaf decided to raise the starting wage to $15/hour. Do you not agree that that would be good for the workers and for Brandon? What Maple Leaf did instead was to bring people in from Mexico who would work in the conditions I described, because it's probably better than what they can find in their own country, and that hurts the domestic workers, because there is no incentive for the company to improve their working environment, as they can always find a source of cheap labour from somewhere else.

quote:

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Originally posted by Ron Webb:
It's unearned because it's not earned, abnormal. Earned income is income from employment.

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As far as your story about Maple Leaf, I'm not sure exactly what your point is. I'd be shocked if more than a handful of the employees are illegal immigrants, and those that are have spent quite a bit of effort at circumventing the system. You're talking about a multinational corporation here. Their payment and accounting systems are tough to get around and the negative PR associated with illegal aliens is a big price to pay. The majority of illegal immigrants get around the system by working for cash doing odd jobs and working for small businesses. Besides, who are you to say that legal immigrants can't take a job that pays several times more than the places from which they came as long as they're here legally? Seems to me your gripe is with Canadian immigration and not the corporation. It's the government that's letting in the hard-working and un-pampered immigrants with which you seem to have so much difficulty. If Maple Leaf is able to fill the jobs and their plants run efficiently, what's so terrible about that? Trust me, if they couldn't fill the jobs or quality was dropping, they'd raise their wages and improve working conditions pronto. Are recent immigrants somehow supposed to determine the median wage acceptable to 'real' (whatever that is) Canadians and only accept that as a wage? Bottom line is that immigrants, from my ancestors, to yours, have always been the ones willing to take the less cushy jobs in every country.

You complain about the low wages-- for which a ton of Canadians are clearly willing to work-- but you do realize that, just as with taxes, massive wage hikes are going to result in layoffs and/or the plant being closed entirely in favor of offshore production, right?

In terms of going down "that road", you already seem to be well on your way. It's not the immigrants' problem, it's the xenophobes who create that road and drive down it in the first place.

[ 01 August 2005: Message edited by: Dex ]

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Originally posted by Ron Webb:
It's unearned because it's not earned, abnormal. Earned income is income from employment.

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Originally posted by Dex:
Trust me, if they couldn't fill the jobs or quality was dropping, they'd raise their wages and improve working conditions pronto. Are recent immigrants somehow supposed to determine the median wage acceptable to 'real' (whatever that is) Canadians and only accept that as a wage? Bottom line is that immigrants, from my ancestors, to yours, have always been the ones willing to take the less cushy jobs in every country.

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My father took what work was available during the depression era. He came back from overseas to find several ethnics who had fought for the other side, working along side him at the mill. They bragged openly about shooting Canadian's and American's during the war. And then they receieved pensions from their first countries while my mother was stuck with half benefits and the rest of a VLA goddamned mortgage to pay on after the old man got sick from years at the chrome plant and coke ovens .Dad lost five years of pension time when he left the plant for overseas in 39.

The point is, you're full of it, Dex. There are all kinds of illegals in Canada. Anywhere from 100 000 to 200 000, according to estimates. Our system tells kids in highschools that house framers earn $25-$30 bucks an hour. Meanwhile, Honduran's and Salvadoran's might come here to do it for $10 bucks an hour because their own countries are such free market shitholes. It's all about low wages and undermining unions and worker's rights in general in this goddamned country. Our liberal and conservative governments have always given Canadian worker's the shaft. We've got the second largest low wage workforce next to the Yanks. They've got millions of illegals in that country and "doing the work that lazy American's refuse to do." Our kind-hearted politicians don't give a damn about those third world shitholes so close to Uncle Sam's back door step. It's about throwing a fuck into the union movement and fighting inflation on behalf of their rich friends in North America, bottom line.

[ 01 August 2005: Message edited by: Fidel ]

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Originally posted by Dex:
Stephen raised the pretty straightforward point that raising taxes will create disincentives to companies in terms of hiring and locating their facilities here in Canada.
...
You complain about the low wages-- for which a ton of Canadians are clearly willing to work-- but you do realize that, just as with taxes, massive wage hikes are going to result in layoffs and/or the plant being closed entirely in favor of offshore production, right?

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If we really want to play the multinational corporations' game of "race to the bottom", then the strategy is to match or beat Mexico and other third world countries in slashing our taxes and wages, until governments everywhere are impotent, citizens are wage slaves, and corporations rule.

On the other hand, we could refuse to play the game. We could get out of NAFTA. We could use tariff protections to encourage Canadian corporations. We could require those corporations, and their investors, to pay their fair share of taxes. And we could control the movement of capital in and out of the country with at least something approaching the diligence that we control the movement of people.

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Originally posted by Dex:
Interesting perspective. I wonder how the vast majority of family farmers, mom and pop convenience store owners, doctors, small business owners, franchise owners, and private fishermen feel about that sweeping generalization?

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the thousand dollar suits

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Fidel,

At the risk of digressing a thousand dollar suit isn't a wonder of tailoring any more. The last time I walked through a room of seriously expensive silk suits was about 20 years ago in Trenton N.J. - I was on a course and we were taken out to a little hole in the wall Italian place. When we started joking about whether or not the bus would still be there when we left the individual organizing the course simply said "Wait until you see the restaurant. Nothing will happen!" We walked into what looked like a little corner family restaurant, except all of the patrons were about 60 years old, male, and wearing the proverbial $2,000 silk suit (think $5 grand US in today's money). Tailoring was so good I only saw one bulge under an armpit.

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Originally posted by Dex:
Question for Stephen:
Just as corporations will raise prices, cut jobs and relocate, so too will people spend less, invest outside of Canada, and move elsewhere. In addition, high personal taxes act as a disincentive for people to immigrate (particularly the most talented and mobile). How then to balance these forces? Is the logic that the flight of people and personal investment is less elastic than is the flight of jobs and capital? It strikes me that there should be a balance between the two. If you wiped out corporate taxes entirely, wouldn't the required increase in personal taxes create a bunch of other problems?

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Labour supply is much, much less elastic than the supply of capital: people are much more attached to where they live than is capital. There's even evidence of 'backward-bending' labour supply curves: people may respond to higher wages by reducing the number of hours worked and taking the increase in the form of leisure instead of income.

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Labour supply is much, much less elastic than the supply of capital: people are much more attached to where they live than is capital. There's even evidence of 'backward-bending' labour supply curves: people may respond to higher wages by reducing the number of hours worked and taking the increase in the form of leisure instead of income.

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Here's a translation for those of you who don't speak economese:

It's OK to jack up taxes on poor wage slaves because there isn't much they can do about it. And it's a great idea to lower their wages because otherwise, they might get uppity and want some leisure time.

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I don't know if you looked at the Growing Public thread (it doesn't seem as though you posted there), but there's another source of tax revenue: consumption taxes (GST/VAT). Those don't affect economic growth.

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Originally posted by Stephen Gordon:
...but there's another source of tax revenue: consumption taxes (GST/VAT). Those don't affect economic growth.

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Originally posted by abnormal:

Fidel,

At the risk of digressing a thousand dollar suit isn't a wonder of tailoring any more. The last time I walked through a room of seriously expensive silk suits was about 20 years ago in Trenton N.J. - I was on a course and we were taken out to a little hole in the wall Italian place. When we started joking about whether or not the bus would still be there when we left the individual organizing the course simply said "Wait until you see the restaurant. Nothing will happen!" We walked into what looked like a little corner family restaurant, except all of the patrons were about 60 years old, male, and wearing the proverbial $2,000 silk suit (think $5 grand US in today's money). Tailoring was so good I only saw one bulge under an armpit.

True story but serious reply to follow.

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Originally posted by Stephen Gordon:
I don't know if you looked at the Growing Public thread (it doesn't seem as though you posted there), but there's another source of tax revenue: consumption taxes (GST/VAT). Those don't affect economic growth.

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Originally posted by Dex:
>snip<

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And I wasn't bothered to even read your personal message to me at the time. I think it evaporated. Sorry to have to do this out in the open, but dry up and drop dead, shithead.

[ 01 August 2005: Message edited by: Fidel ]

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Originally posted by Ron Webb:
Let's see, suppose I pay $10 for an item plus an extra dollar for a VAT of some sort, which the corporation passes on to the government. How is that different from the government raising corporate tax by the equivalent of $1 on a $10 item, and the corporation passing the increase on to the consumer, as you suggested in your first post? Why does one affect economic growth, but not the other?

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Originally posted by Ron Webb:
On the other hand, we could refuse to play the game. We could get out of NAFTA.

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This whole unfair advantage of the third world is a total sham. People talk all the time about all of the advantages that third world countries have in terms of wages. But what about Canada'a advantages? We don't have massive corruption and crime where companies have to shell out millions just so their shit doesn't get confiscated by the government or blown up. We don't have a huge portion of our productive workforce dropping dead due to preventable diseases. We don't have civil wars that disrupt shipments. We don't have coups d'etat once every year or so that require complete renegotiations of trade deals. We don't have to randomly add zeroes to our currency due to out of control inflation and debt. Pretty much everyone here speaks the predominant language of business. We have utilities that work 99.9% of the time. We have a highly skilled, educated, and trained workforce. Canada is more than able to compete with other countries. Protectionism makes companies fat and lazy, with no pressure to make safe, reliable, cheap products. It gives us things like the North American cars of the 70s and 80s. They were broken down constantly. GM at one point produced two model in which better than 90% of the vehicles had to be recalled. Prior to real competition from the Japanese, North American cars were literally falling apart after just a few years due to rust and other mechanical problems. They'd still be doing so today if the border hadn't been opened to foreign competition.

[ 02 August 2005: Message edited by: Dex ]

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How exactly do you figure that raising corporate taxes is going to stop firms, domestic or foreign, from concentrating on the bottom line? Stephen raised the pretty straightforward point that raising taxes will create disincentives to companies in terms of hiring and locating their facilities here in Canada. Everything you've pointed to at this point just reinforces what he says or pretty much has nothing to do with the discussion at hand.

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I don't. I was making the point that corporations don't care about anything other than their own bottom line, and they have to be dragged kicking and screaming before they do anything for anyone else. Ask anyone who works for a corporation if they feel the corporation cares about them.

Lowering corporate taxes doesn't give coroprations incentives to invest. We've been doing that for several years, and our economy is still increasingly dependent on low-wage service sector jobs.

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Seems to me your gripe is with Canadian immigration and not the corporation. It's the government that's letting in the hard-working and un-pampered immigrants with which you seem to have so much difficulty.

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First of all, read and understand that post before calling me a racist. I made it abundantly clear that I have no problem with people coming here because they want to improve their lots in life. My issue is Maple Leaf taking advantage of workers in Mexico who will tolerate worse conditions than their Canadian counterparts will.

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I'd be shocked if more than a handful of the employees are illegal immigrants, and those that are have spent quite a bit of effort at circumventing the system. You're talking about a multinational corporation here. Their payment and accounting systems are tough to get around and the negative PR associated with illegal aliens is a big price to pay.

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In the southern States, there's a huge stigma against illegal immigrants, yet businesses love them because they save the company money. They get away with this in spite of the anti-illegal immigrant stigma.

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If Maple Leaf is able to fill the jobs and their plants run efficiently, what's so terrible about that? Trust me, if they couldn't fill the jobs or quality was dropping, they'd raise their wages and improve working conditions pronto.

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If you read my post, you'd understand that Maple Leaf, when faced with a staffing problem, turned to Mexican workers instead of raising wages and improving working conditions. If you have a large crop of people willing to work in bad conditions who can easily come in from another country, why worry about raising standards for the locals?

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You complain about the low wages-- for which a ton of Canadians are clearly willing to work-- but you do realize that, just as with taxes, massive wage hikes are going to result in layoffs and/or the plant being closed entirely in favor of offshore production, right?

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I don't know whether Canadians are willing to work low-wage jobs or if they need to find whatever job they can in order to not have to sleep under a bridge. And you only prove my point about the problems with decision makers being removed from the locales where the impacts of said decisions will be felt.

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In terms of going down "that road", you already seem to be well on your way. It's not the immigrants' problem, it's the xenophobes who create that road and drive down it in the first place.

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The reasons I got all het up about your post were manifold, but I'll point out a couple: (1) again, the blame for xenophobia lies squarely and only at the feet of the phobes; (2) your implication that the people working in Brandon were illegals and/or the community had to support them. If you knew anything about immigrants and/or the immigration system, you'd know that there are pretty elaborate safeguards which ensure that people entering the country are gainfully employed and will not be a drain on the social system, to say nothing of the fact that the vast majority of immigrants who come here are the go-getters of their respective cultures and have come here to better themselves and not to be welfare bums.

[ 02 August 2005: Message edited by: Dex ]

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Originally posted by Ron Webb:
I work hard for my income. I don't mind paying my fair share of taxes, but I have to say I get a bit testy when unearned income gets a free ride.

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Corporate income doesn't get "a free ride". By taxing corporate income, it's being taxed twice: once at the corporate level and once again when dividend income is paid to shareholders.

The solution in the US has been the (relatively) recent creation of limited liability companies. Although it's too expensive for existing corporations to convert to LLCs, most newly-created companies are LLCs. The tax on the income of the company is paid directly (but only once) by the shareholders/members.

[ 02 August 2005: Message edited by: Sven ]

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Hold on a second. Your story was specifically about a single plant in Brandon, Manitoba and I still maintain that the number of illegals working at that plant would be extremely small for a number of reasons. And look, I live in the States in an agricultural area, so you don't have to explain to me about the stigma related to illegal immigrants and their employment. Just so you know, it's massively expensive, risky, and time-consuming to bring people into the country. I just started a job as a university professor at a business school this week in Kansas and they aren't paying my immigration costs, so do you really think Maple Leaf is footing the bill for the Mexican immigrants who work the line in Brandon? The reality is more likely that a small number of them got established, passed the word about availability of good paying work and helped each other pay for and navigate the immigration process.

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I did not say that the Mexicans working in Brandon are illegals. I'm sure that every one has gone through proper channels and is legally entitled to be here. You're the one who read into it. I don't know specifics of how the Mexicans made it here, but I'm certain that many couldn't have found the resources to come here on their own, so I do believe that Maple Leaf had something to do with that. And believe me, they do save money by hiring Mexicans.

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The reasons I got all het up about your post were manifold, but I'll point out a couple: (1) again, the blame for xenophobia lies squarely and only at the feet of the phobes; (2) your implication that the people working in Brandon were illegals and/or the community had to support them. If you knew anything about immigrants and/or the immigration system, you'd know that there are pretty elaborate safeguards which ensure that people entering the country are gainfully employed and will not be a drain on the social system, to say nothing of the fact that the vast majority of immigrants who come here are the go-getters of their respective cultures and have come here to better themselves and not to be welfare bums.

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I don't think you quite understand what I'm saying. People blame immigrants for taking away people's jobs, and if people are struggling to find work while foreign-born employees are brought in, those foreign-born employees will make a very convenient scapegoat, and that will not be pretty.

As for the safeguards you mentioned? $9/hour isn't that much; if you're making that much in Manitoba, you're barely at the poverty line, and people in poverty either get government services or they sleep under bridges. I know that people come to Canada to improve their lives, and that they don't have the same kind of access to such things as welfare as the local citizens do. I have met foreign students at university, and I'm happy that they have a chance to come here, study, and find work for themselves when they're done.

My problem is not with immigrants or immigration, but with a system that exploits the vulnerability and initiative of immigrants.

[ 02 August 2005: Message edited by: Aristotleded24 ]

More than you might realize, the historical arcs of the Canadian and US economies are similar enough that comparisons between the two are valid for illustrating points, such as the broad similarities in tax structures, as the following data points show:

Top marginal rate (Canada), circa 1955: 80%
Top marginal rate (USA), circa 1955: 91%

Top marginal rate (Canada), circa 1995: 45% (depends on province)
Top marginal rate (USA), circa 1995: 39.6%

Furthermore, it is the contention, repeated ad nauseam by the Republicans, Conservatives, federal Liberals and their butt-buddies in the media, that lower corporate income taxes will let corporations go gangbusters on capital investment.

So why the h e double hockey sticks has net fixed investment as a percentage of GDP been virtually unchanged in the USA in the fifty years since this refrain first got touted? Why has it gotten worse in Canada since the 1970s?

Your continued insistence on continuing the GST as the panacea for something as nebulous as "hurting or helping economic growth" keeps running aground of a very salient fact: Canadians hate this friggin' tax!

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Originally posted by Sven:
Look at what Ireland's done over the last ten to twenty years since it cut the corporate tax rate to about 10% (relative to 50% or more in, say, Germany). Ireland probably has one of the best economies in Europe and an unemployment rate of nearly zero (compared to nearly double digits in France and Germany).

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Sven,

Ireland also poured a tonne of money into post-secondary education and training, and they ignored monetarist dogma and allowed for higher inflation rates (and real economic growth) than the rest of Europe, which is just as important as creating a competitive taxation system.

Also, Ireland certainly isn't "one of the best economies" in Europe, especially for its poor and working class, since its wages are still lower compared to Northern Europe.

Even if creating an entirely business-friendly atmosphere was the key to economic growth (which it isn't), it doesn't cure the problem of the global race to the bottom.

Ireland simply exported jobs to the rest of Europe during the 1990s. There's no NET creation of jobs when investors are given a free ride. The jobs are simply taken from one place and created in another.

[ 02 August 2005: Message edited by: Sean Cain ]

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Labour supply is much, much less elastic than the supply of capital: people are much more attached to where they live than is capital.

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Originally posted by DrConway:
Stephen Gordon:

Your continued insistence on continuing the GST as the panacea for something as nebulous as "hurting or helping economic growth" keeps running aground of a very salient fact: Canadians hate this friggin' tax!

If you want to commit a very elaborate form of political suicide, just advocate what you keep doing - increasing the GST. It won't matter if you say the guv mint will cut GST checks for 25% of the population on a daily basis. All they'll remember is that on your watch, the GST got raised to 10% while Paulie's buddies in the steamship industry got another tax cut.

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This whole unfair advantage of the third world is a total sham. People talk all the time about all of the advantages that third world countries have in terms of wages. But what about Canada's advantages? We don't have massive corruption and crime where companies have to shell out millions just so their shit doesn't get confiscated by the government or blown up. We don't have a huge portion of our productive workforce dropping dead due to preventable diseases. We don't have civil wars that disrupt shipments. We don't have coups d'etat once every year or so that require complete renegotiations of trade deals. We don't have to randomly add zeroes to our currency due to out of control inflation and debt. Pretty much everyone here speaks the predominant language of business. We have utilities that work 99.9% of the time. We have a highly skilled, educated, and trained workforce. Canada is more than able to compete with other countries. Protectionism makes companies fat and lazy, with no pressure to make safe, reliable, cheap products. It gives us things like the North American cars of the 70s and 80s. They were broken down constantly. GM at one point produced two model in which better than 90% of the vehicles had to be recalled. Prior to real competition from the Japanese, North American cars were literally falling apart after just a few years due to rust and other mechanical problems. They'd still be doing so today if the border hadn't been opened to foreign competition.

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And corporations don't really give a shit when it comes to protecting all those great advantages ... oh sure, an international investor will look at these advantages when it comes to the decision to locate in Canada, but once here there will join the rest of the Canadian corporate cannibals and demand that these "advantages" be paid for with someone elses money. They fight, bribe, threaten , trick, or infiltrate the government to do the things that best benefit this quarters bottom line, which means less taxes to pay for the services they call "Canadian advantages".

I know the GST is unpopular, but it plays a big part in making it possible to finance social programs without sacrificing economic growth. It's a good policy, and a responsible policy-maker wouldn't be trying to trash it in order to score electoral points.

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Originally posted by Lard tunderin' jeesus:
So why does capital require transnational agreements overriding national sovereignty (NAFTA. CAFTA), and why does it push governments to restrict labour flow?

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Because capital is mobile. One of the risks foreign investors face is the prospect of being jerked around by local politicians looking for a convenient scapegoat. Once you've decided that you really do want foreigners to set up shop here, you have to find a way of convincing them that you won't bait-and-switch. One way of doing that is to commit yourself to treating foreign firms the same as you'd treat domestic firms.

I don't know what you mean about restricting flows of workers, though. There's no economic reason to do that. Precisely the opposite, in fact - aside from the minimal condition of making the flow manageable (eg: making sure we have enough housing for new arrivals), I'd prefer opening the borders.

[ 02 August 2005: Message edited by: Stephen Gordon ]

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Because capital is mobile.

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[ 02 August 2005: Message edited by: Lard tunderin' jeesus ]

(Granted, in the 1940s they were controlled because in wartime, you don't let the enemy take its money out of your country, but... )

Further to the GST and economic growth. I would be interested to see just how much of an impact there actually is from bumping the personal income tax up a few points and dropping the GST.

I need not remind you that when Canada had a narrower-based MST in the 1950s and 1960s, with higher personal income taxes, our economic growth rates were higher as well.

Implicit in your assertion that consumption taxes are the way to go are the following:

1. Disregard of the adverse impact on income distribution due to the way the tax works,
2. Assumption that fixed capital investment, lubricated by savings, is the driver of economic growth.

To (1), I argue that on fairness grounds we must have a progressive income tax with few loopholes.

To (2), I argue that demand conditions are a primary driver of economic growth, and as such is an implicit reversal of your assumption, which assumes that supply creates its own demand rather than demand creating its own supply. Added to this is that the impact of (1) on (2) means that if people can't spend as much money because the consumption tax is higher, then your assumption that the tax aids economic growth is clearly invalid, since sagging demand means slower economic growth rates.

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Originally posted by DrConway:
Capital flows were restricted in the 1940s, 1950s and 1960s and those restrictions certainly didn't do any harm, now did they?

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Well, yes, they did: they systematically prevented capital from being allocated to where it would be most effective. And they made it literally impossible for poor countries to catch up to rich countries.

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Further to the GST and economic growth. I would be interested to see just how much of an impact there actually is from bumping the personal income tax up a few points and dropping the GST.

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Answering that would require (i) a structural model of the economy that included both features, and (ii) a rigourous statistical analysis. It may very well be a wash: labour supply is pretty inelastic (i.e., the brain drain isn't worth worrying too much about). But the supply of capital is much more sensitive to corporate taxes.

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Implicit in your assertion that consumption taxes are the way to go are the following:

1. Disregard of the adverse impact on income distribution due to the way the tax works,

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2. Assumption that fixed capital investment, lubricated by savings, is the driver of economic growth.

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That's not an assumption; it's a result common to all the standard theories of economic growth. Stimulating aggregate demand increases output only if there's excess capacity; if we're already at full capacity, then stimulating AD will only increase inflation. Sustained economic growth is only possible if productive capacity increases. That is, through fixed business investment.

[ 02 August 2005: Message edited by: Stephen Gordon ]

It is thus the case that all the stimulation of fixed investment through corporate tax cuts has been a waste, because the demand conditions don't exist for it.

As for the poor countries being unable to catch up? They did better in the 1950s and 1960s than post-the 1970s, even if their performance in both eras was lackluster by comparison to the industrial nations. I seem to recall that economic growth in most of the African nations, for example, has been virtually nil since the late 1970s, whereas it was a slightly positive percentage prior.

China and India, I will remind you, are anomalies in particular due to the strong state-interventionist character of their economies until the mid-1980s, and even after that there has remained substantial interventionism.

What I find troubling is your insistence that if capital were to simply be set free, it would somehow work miracles of wonder that defy comparison.

I put it to you then, why in an era of more freely floating capital, have economic growth rates in the industrial nations sagged compared to the era when capital was restricted?

I put one answer to you: Immigration laws regarding the movement of people between industrial nations were less strict than they are today.

The free trade model that Ricardo once posited is essentially that: Restricted capital, mobile labor. I would say it certainly turned in the results he said it would!

Re: GST.

I have not heard of the Scandinavian countries transferring monies to alleviate the impact of consumption taxes. Furthermore, and I still don't see why you miss this, it doesn't matter if I know I will get my GST check in three months; I need the money now. This, if it happens across a broad swath of the population, crimps demand during the time when GST has to be paid out, and then creates a series of booms and busts every three months as the GST checks come and people spend them.

Now you will argue (and quite properly) that if the government were to send out the money every day you would even out the loss of purchasing power and prevent the slight 'trigger effect' of GST monies coming out every three months (and I would agree with you that the overall impact of the stop-go nature of the effect on consumer demand is probably rather slight) messing things up a little.

Can think circles around me.

Dr. Conway ....

Can too.

and i'm lazy, so, ... what do we currently bring in to the federal government in revenues, and what do we imagine a consumption tax regime would bring in (minus payouts to lower-income groups)?
And, how much wonderful, magical, solve-all-our-problems capital investment is a consumption tax regimen supposed to create?

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Corporate income doesn't get "a free ride". By taxing corporate income, it's being taxed twice: once at the corporate level and once again when dividend income is paid to shareholders.

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Using the same criteria, personal income is also being taxed twice. Once when it is earned, and again when it is either saved (in the form of interest income) or spent (in the form of sales taxes). Because of measures like dividend tax credits, dividend income receives more favourable tax treatment than interest income, for example.

[ 03 August 2005: Message edited by: John K ]

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Originally posted by Dex:
Seriously, would you like to see all industries in Canada do as well as the Canadian beef industry did with a closed border? We are an exporting nation. Freer trade does wonders for us. And all those new auto plants that have opened in the past years? Do you think a single one would exist today under your scheme?

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Under the various free trade agreements, exports (and imports) have substantially increased, but only at the expense of domestic trade. The net economic effect has been negative. According to Mel Hurtig:

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First, the growth rate of Canada's gross domestic product during the 1990s was lower than during any decade since the great depression!
In the period 1990-2000, compared to all other countries, Canada placed an embarrassing 80th in GDP growth.
During nine of the past 13 decades, Canada's GDP growth was greater than that in the U.S.
BUT, since the FTA came into effect, the U.S. outperformed Canada in eight of 14 years.
During the decade before the FTA, in GDP growth, Canada outperformed the G-7 average, the OECD average, and the average of the European Union. During the 1990s, it fell behind all of them.

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What is even more worrying is NAFTA's effect on our independence as a nation. We used to pride ourselves in being relatively self-sufficient; now we are increasingly reliant on and vulnerable to the U.S. and to corporate interests (e.g., BSE, softwood lumber, drug pricing, water and energy policies -- need I go on?). If this goes on, there is a very real chance that Canada will cease to exist in a few decades; and frankly, I don't want to be an American.

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Originally posted by Sven:
Corporate income doesn't get "a free ride". By taxing corporate income, it's being taxed twice: once at the corporate level and once again when dividend income is paid to shareholders.

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All money is taxed multiple times, essentially every time it changes hands. The money in my paycheque was taxed when my company received it, it's taxed when I receive it, and it will be taxed again via PST and GST when I spend it. If corporations want to be legal "persons", then why shouldn't their income be taxed just like mine, and just like their shareholders'?

[ 03 August 2005: Message edited by: Ron Webb ]

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Originally posted by DrConway:

I put it to you then, why in an era of more freely floating capital, have economic growth rates in the industrial nations sagged compared to the era when capital was restricted?

I put one answer to you: Immigration laws regarding the movement of people between industrial nations were less strict than they are today.

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